Scalper1 News
Summary Be careful what you wish for! I always write that I only care about INCOME, and not so much about how the market values my portfolio (i.e. the “income factory”). In 2014, that’s what I got: great income (10% cash yield) but negative 6% capital appreciation. The good news: Current yield (and re-investment rate) is up to 11%. Lots of good bargains out there. And I wouldn’t worry about rising rates or inflation spoiling the party. Last year – 2014 – put to the test my claim that I focus on the income stream my IRA portfolio produces and try not to worry about how the market values the “factory” – i.e. the investment portfolio – that produces that income stream. Because of my emphasis on high yielding investments (an average portfolio yield of over 10%), my investments, mostly closed end funds, got hammered this past quarter as high yield loans and bonds and similar investments sold off amid fears of a combination of higher interest rates, plunging oil prices, global recession, and a worsening credit environment, among other things. Despite annual dividend income of 10%, my total return for the year was just under 4%. That means, of course, that without the dividend income my portfolio would actually have dropped in market value by 6%. The good news, of course, is that the 10% in actual cash I received in dividends last year has been compounded – reinvested in additional assets – so that the earnings stream from my IRA portfolio is now 10% greater than it was a year ago . And because many of the assets have been marked down by the market from what they were a year ago, the average yield on the portfolio (i.e. what I’m reinvesting new money at ) is now almost 11%. By comparison, had I invested, for example, in the S&P 500, I would have collected dividends of just slightly over 2%, so my income “factory” would be 2% bigger than it was a year ago, instead of 10% bigger. However, the market would be valuing the portfolio at 11.5% more than 12 months ago. So the overall return on the S&P 500 portfolio would have been 11.5% in capital appreciation plus 2.2% in dividends collected, for a total return of 13.7%. So the trade-off between my “cash flow focused” investment approach and a more conventional equity-oriented strategy turned out to be: · For my “ultra high yield” portfolio, 10% in actual cash income and an income stream going into 2015 that is 10% larger than it was a year ago, but a portfolio that actually dropped 6% in market value (before the dividends were added back), versus · For the S&P 500, 2.2% in actual cash income and an income stream that would therefore only be 2.2% larger today than it was a year ago (assuming the dividends were reinvested), but along with it there would be market appreciation (i.e. paper profit) of 11%. There are plenty of good arguments in favor of both approaches, (1) maximizing total return, versus (2) maximizing and compounding cash income, and of course there are a myriad of other hybrid strategies in between, as well. Readers of my past articles know that I prefer maximizing, compounding and growing the cash distribution from the portfolio, and not worrying too much about the vagaries of how the market values the investment “factory” from time to time. Investors have to pick the approach that works for them in terms of (1) meeting their long-term goals, and (2) allowing them to sleep well at night. For me, knowing my income stream is compounding continually at a nice 9 to 10% rate, regardless of what the market does, allows me to sleep great. Besides, it is nice – if you were a retiree – not to have to liquidate holdings (“sell part of the factory”) each year in order to generate cash to live on. Here are the changes I made to the portfolio during the 4th quarter. As the US stock market got higher and higher later in 2014, while the global economy didn’t seem to have gotten the same memo and appeared to be lagging, I shifted my thinking even more to the idea that safer, more predictable “equity” returns (i.e. 9 -10% or so) were available in the credit markets than in the equity markets. I became even more convinced of this as I saw investors as a whole moving away from high yielding credit markets (bonds and loans), bringing prices down and yields up (and increasing discounts on many credit and income-focused closed end funds.) So if you review my portfolio (below), you’ll see some lightening up in a few equity-oriented funds, and some increase in my position in the high yield bond and senior loan fund space. In particular, I added a major position in Pimco Strategy Fund II PFN ) , which seemed like a good buy with so many people down on Pimco after Bill Gross’s departure, despite what seems like a great continuing line-up of managers and funds. In PFN’s case, the 9.5% yield and almost 3% discounted price for a fund that has the flexibility to be opportunistic in buying high yield bonds, floating rate loans and other income securities looks pretty good to me. Its recent distributions have been all income (no ROC), which I also like. Of course, I continue to hold its sister fund, Pimco Dynamic Credit Income Fund (NYSE: PCI ), as a major holding. It’s another go-anywhere fund, with a 9.2% distribution and currently available at a 10% discount to NAV. I also added to my holdings of Ares Multi-Strategy Credit Fund (NYSE: ARMF ), another go-anywhere fund with a nice distribution (9.3%), a discount over 10% and distributions covered by current income. In addition, I added the loan fund managed by the same group, Ares Dynamic Credit Allocation Fund (NYSE: ARDC ). A distribution of 8.8% covered by current income, a discount over 12%, and a focus on secured loans and high yield bonds. Nice income, good discount, solid assets, experienced managers. That’s the sweet spot, as far as I’m concerned. Another recent addition was Cohen & Steers Ltd Duration Preferred Income Fund (NYSE: LDP ). Attractive distribution (over 8%) at a nice 10% discount. Thanks to Morgan Myrmo for the tip! In the somewhat more exotic credit and ultra-high yield space that I use to boost my overall portfolio yields, there are four primary investments. I made some re-allocations within the group, although I increased the size of the group as a whole. It includes the following holdings: · Oxford Lane Capital (NASDAQ: OXLC ) is a unique closed end fund that holds equity in numerous collateralized loan obligations (“CLOs”), which are virtual banks. They provide highly leveraged, potentially volatile returns in the teens or higher (or lower), depending on credit experience, interest rate movements and a host of other technical, hard-to-monitor factors. (For more info, see the various other articles on Seeking Alpha, including this recent one ) For a while it was the only real game in town for retail closed end fund investors who wanted to make the mid-teen yields that CLOs can provide. With the arrival of Eagle Point Credit (NYSE: ECC ) last year, investors have an option, so I have reduced some of my OXLC exposure and added ECC. · ECC’s distribution, so far, is only about 10-11% versus OXLC’s 14-15%, but the assets held by both are similar and I suspect that ECC’s management is starting out modestly with a yield they feel confident they can deliver, but there may be some upside to it as they move forward. · In addition, during the last two quarters I have added two leveraged exchange traded notes (“ETNs”) to the portfolio, the UBS ETRACS Leveraged REIT (NYSEARCA: MORL ) and its sister ETN the UBS ETRACS Leveraged CEF (NYSEARCA: CEFL ). These two notes (issued by Swiss banking giant, UBS, so you do carry the credit risk of UBS, along with the other risks) are based on an index of REITs and an index of closed end funds, respectively, but leveraged two times. At today’s prices, they are each yielding in excess of 20%. The market risk of the two indices (i.e. the REIT market and the closed end fund market) tanking does not concern me too much from an income perspective (i.e. they are both well diversified and, even if the market prices of the index components drop, I am not so worried about the income stream from their dividends drying up). The other major risk is that the cost of leverage could go up (it is currently peanuts to a big institutional borrower like UBS), which would reduce the income boost from the leverage. For reasons mentioned below, and in a separate article I hope to publish soon, I do not consider near or medium term increases in interest rates (or inflation, which drives interest rates up) to be a big risk. · For information about these two ETNs, please refer to the articles by Lance Brofman here on Seeking Alpha, which help to make these somewhat opaque investments more transparent for many readers (including me). The latest ones are here and here . A word on interest rate risk. Sharply higher interest rates could certainly derail a high yield fixed income strategy like mine. For a number of reasons, I do not foresee interest rates and inflation rising very rapidly: · “Wage push” inflation is over for a long time to come, as a result of the globalization of our economy. Whether it is morally right or not, management of most companies will move jobs overseas at the drop of a hat if they see a cost advantage in doing so. We are currently in the midst of a long term “leveling” of wages between the developed world and the less developed world. As long as there are competent, educated people in less-developed countries willing to do jobs for less than developed market workers, there will not be the “wage push” inflation of 20-30 years ago. “Al Bundy” could work in a shoe store 25 years ago and make enough to own a home and raise a family. Those jobs are gone and will stay gone until people in shoe stores or making shoes or doing whatever are making the same wage all around the world. · Meanwhile, those who do have specific skills or do jobs that can’t (for economic, social or political reasons) be replicated from thousands of miles away – so-called “knowledge workers,” or management who call the shots and set their own pay, etc. – will continue to make more and more in relation to everyone else, so the gap between the top and the bottom rungs of the economic ladder will continue to increase. This means there will continue to be more money going to the top, to people who don’t spend it all and therefore save and invest it. So the liquidity glut will continue, with lots of money chasing investment opportunities. (That’s why so many companies keep buying in their own stock.) This will also help keep a lid on interest rates. · These are some of the reasons why you are starting to see as much concern being expressed recently in the press about deflation as you do about inflation. · All this tells me that a steady income stream of about 10%, compounding and running out as far as the eye can see, will look pretty attractive, given an environment where inflation and interest rates will most likely be well contained. As always, I appreciate the help of the legion of Seeking Alpha analysts and contributors who provide me with so many interesting investment ideas and candidates. I hasten to add, once again, that I am merely reporting what I do with my own money and why. I’m not suggesting anyone else should necessarily do the same thing. But hopefully it is thought provoking and interesting. Happy New Year!! Here’s the portfolio, as of January 6, ranked by the percentage contribution to total income of each holding: “Savvy Senior” IRA Portfolio – 1/6//2015 Name Symbol Current Yield CEF Premium/ Discount Portfolio Income % This Holding Comment Third Avenue Focused Credit Fund TFCIX 11.10% NA 10.79% Pimco Dynamic Credit Income Fund PCI 9.20% -10.15% 7.05% UBS ETRACS Leveraged CEF CEFL 20.95% NA 6.69% Increased Cohen & Steers Closed End Opportunity Fund FOF 7.90% -8.93% 5.54% Eaton Vance Limited Duration EVV 8.67% -11.11% 4.91% Eaton Vance Risk Managed Diversified Equity Income Fund ETJ 10.30% -10.19% 4.06% Oxford Lane Capital Corp. OXLC 15.85% -2.57% 4.02% Reduced Eaton Vance Tax Managed Global Buy Write Fund ETW 10.45% -9.04% 3.98% Reduced Eaton Vance Tax Managed Global Diversified Income Fund EXG 10.24% -7.57% 3.69% Reduced Nuveen Real Asset Inc & Growth Fund JRI 8.49% -4.47% 3.62% Pimco Income Strategy Fund II PFN 9.56% -2.71% 3.41% New UBS ETRACS Leveraged REIT MORL 20.40% NA 3.16% Wells Fargo Advantage Global Dividend Fund EOD 9.81% -9.73% 2.93% Increased Nuveen Preferred Income Oppty Fund JPC 8.06% -10.10% 2.88% Increased Ares Multi Strategy Income Fund ARMF 9.34% -12.19% 2.85% Increased Calamos Global Dynamic Income Fund CHW 9.38% -6.48% 2.38% First Trust Inter. Duration Pfd & Inc FPF 8.73% -6.68% 2.22% First Trust Specialty Financial Oppty Fund FGB 8.90% 5.16% 2.11% Increased John Hancock Pref Income HPI 8.17% -5.56% 1.99% Reduced Brookfield Total Return Fund HTR 9.41% -8.59% 1.89% Increased Eagle Point Credit Co. EEC 10.83% 1.96% 1.87% New TICC TICC 15.14% NA 1.85% Brookfield High Income Fund HHY 10.12% 7.80% 1.75% Increased Apollo Tactical Income Fund AIF 8.82% -12.63% 1.69% BlackRock Multi-Sector Income Trust BIT 8.33% -12.76% 1.69% Increased Credit Suisse High Yield DHY 10.43% -3.15% 1.62% Reduced Ares Dynamic Credit Allocation Fund ARDC 8.82% -12.63% 1.49% New Wells Fargo Advantage Income Oppty Fund EAD 9.36% -8.38% 1.38% Western Asset High Income Fund HIX 10.15% -3.45% 1.31% Increased Black Rock Debt Strategies Fund DSU 7.83% -12.38% 0.89% Reduced THL Credit Senior Loan Fund TSLF 8.36% -9.13% 0.80% New Voya Natural Resources Equity Income Fund IRR 12.37% -10.90% 0.77% New VOYA Global Advantage Fund IGA 9.98% -8.41% 0.65% First Trust Strategic High Income Fund FHY 9.89% -7.44% 0.58% Cohen & Steers Ltd Duration Pref Income Fund LDP 8.13% -10.60% 0.57% New Medley Capital Corp. MCC 16.09% NA 0.41% John Hancock Premium DividendFund PDT 7.84% -11.55% 0.36% Special Opportunities Fund SPE 9.49% -7.52% 0.14% New Avenue Income Credit Strategies ACP 0% Eliminated Fifth Street Financial Corp. FSC 0% Eliminated Nuveen Equity Premium Advantage Fund JLA 0% Eliminated New Mountain Finance Corp. NMFC 0% Eliminated Pennant Park Investment Corp. PNNT 0% Eliminated Prospect Capital Corp. PSEC 0% Eliminated Cohen & Steers REIT & Pfd Fund RNP 0% Eliminated THL Credit inc. TCRD 0% Eliminated Weighted Average Yield 10.99% 100% Scalper1 News
Scalper1 News