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In a basic sense, total return is a strategic midpoint between a focused income philosophy and a pure capital growth methodology. Those employing total return are apt to consider any security under the sun in hopes of generating attractive risk-adjusted return, a combination of market-besting growth and variable income.

From my perspective, total return could be broken down further into strategy subsets with some investors skewing portfolios toward capital growth and others toward income stream development. Due to the way in which many dividend growth adherents invest, I believe the way they manage their portfolios is really a narrowly defined brand of total return.

In Search of Total Return

For me, there are six critical due diligence and portfolio management analysis points endemic to my personal total return strategy. I've listed them below in relative order of importance. Other total return investors may or may not include these points in their security analysis, may include other evaluation points, or may differ on importance hierarchy

  1. Security valuation
  2. Forward perceived security growth potential and/or stability
  3. Current macroeconomic scenario and forward prospects
  4. Current yield and forward yield stability and/or growth
  5. Security-specific technicals
  6. Market technicals

In my view, items 1 and 2 are the most critical evaluation points for long-term return success. Points 3, 5 and 6 are more important for near- to intermediate-term asset allocation and/or security purchase or disposition purposes, but are certainly helpful in the security selection process. For the total return investor, dividend analysis (point 4) certainly plays a role, but I would argue somewhat of a subservient role to valuation and growth analysis/perception.

In so far as risk management is concerned, while all six of the above evaluation points figure in to the risk equation either near- or longer-term, I believe the top three are the most critical for the management of risk.

Asset Allocation and Portfolio Management

For the total return investor, savvy asset allocation amongst investment types is a must. While it's impossible to be a perfect market timer, macroeconomic data can be analyzed and prudent portfolio allocation decisions made based on a thoughtful forward outlook for asset classes, geographic regions, equity market sectors, and specific securities.

Nuanced moves between asset classes and specific portfolio positions as pitfalls increase in one area and opportunity emerges in another can increase return and keep overall portfolio risk low. Successful total return investors shouldn't be afraid to be nimble. And perhaps most importantly, total return investors should never develop a psychological attachment to any one investment.

Allocation decisions should be based on personal need and an overall risk profile. In the current market, for example, a total return investor with a high-risk tolerance and desire or need for a high level of income might consider junk bonds, highly leveraged mortgage REITs, and business development companies. But another investor with a lower tolerance for risk and lower income requirement might avoid such investments and opt for less of the above and more blue-chip equity-income positions and possibly even investment grade bonds. A growth skewed total return investor might pay little or no attention to yield altogether.

Speaking of bonds, obviously the low rate environment has elicited a rather taboo view from the broader investment community and total return investors like myself. Yet, for the investor with a bearish macroeconomic and equity view and/or need for principal protection, bonds can still be a storehouse of value and a safety net. Are they a great idea for whopping return going forward? Probably not. But, can certain types of bonds still fit into the construct of a total return portfolio? I believe the answer to that question is yes.

Remember, the goal of this strategy is to generate a return in excess of closely followed market indices. Beating the market obviously could mean generating a positive excess return, but it can also mean keeping losses to a minimum or less than the overall market in a down year, or bearish secular climate.

Getting to the Equity Core

From an annual total return perspective, there is no difference between a stock that pays a 2 percent yield whose stock price appreciates 8% and a stock that pays an 8% yield and gains 2 percent in stock price. As I mentioned above, the route one takes in picking securities is predicated on personal circumstance and overall need.

I personally invest in an eclectic mix of security types that provides me with diversification, market-besting total return potential, and an adequate income stream. Below is a sampling of seven of my total return positioned holdings and a brief description of why I own them.

  • Northstar Realty Finance (NRF) - I see commercial real estate as a strong space currently and Northstar, a CMBS mREIT, seems well managed with a particularly attractive multi-pronged business model. (8.4% yield)
  • Solar Capital (SLRC) - A business development company with what I perceive again to be solid management. Solar's recent acquisition of Crystal Financial appears culturally logical and provides additional scale as the company continues to grow its equity and financial operations targeting middle market companies. (9.5% yield)
  • Eaton Vance TM Global EI Fund (EXG) - a option-income closed-end fund investing and selling call options on mostly non-U.S. blue chip securities. The fund currently trades at a better than 10% discount to NAV and provides a distribution yield in excess of 10 percent.
  • American Realty Capital Properties (ARCP) - A brick-and-mortar REIT specializing in stand alone triple net properties. The company's recent merger proposal with American Realty Capital Trust III will provide it with scale and finance benefit. Though I'm somewhat skeptical of management, I think the forward total return proposition here is much better than other triple net operators, including Realty Income (O) and W.P. Carey (WPC).
  • UGI Corporation (UGI) - A diversified energy business providing gas and electricity to residents in the mid-Atlantic region. The company also has a mid-stream business and is the sole general partner of AmeriGas Partners L.P. (APU), in which it owns a 26% stake. That stake alone is worth about a billion dollars or roughly a quarter of UGI's current $4 billion market cap. (3% yield)
  • Textainer Group (TGH) - The largest player in the shipping container market, with roughly 18% share. The majority of the company's business is leasing owned containers to customers, but it also manages containers for third party owners and plays in the secondary container market, constantly looking for asset purchase and disposition opportunities. (4.4% yield)
  • Accenture (ACN) - A preeminent business consulting firm. Slow and steady wins the race here. A good business, conservatively managed company and continued long-term total return play in my view. (2.2% yield)

These ideas from my portfolio may offer a building block for you, or may be ones to clearly avoid based on your personal parameters. Since portfolio-building and management is such a personal thing, I would never suggest that you should buy anything that I happen to own.

Be Active, But Not Overactive

I monitor my portfolio positions frequently, but am more apt to trade around them, rather than in and out of them. What's the difference? Trading around positions involves accumulating and trimming securities rather than totally disposing of them or taking gigantic initial positions and unreasonable risk. I consider this a more prudent strategy for the average total return investor. As long as the business is sound, trim when they are on an upswing, accumulate when they trade down and consider disposal only when there is a fundamental breakdown or ridiculous upside valuation move.

While total return is not a trading strategy per se, I don't feel it should be a set it and forget it strategy either. The market frequently moves on emotion and not fundamentals. Being aware and ready to take advantage of this irrationality and inefficiency is what separates mediocre from great total return.

Disclosure: I am long ACN, ARCP, EXG, NRF, SLRC, TGH, UGI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: The above should not be considered or construed as individualized or specific investment advice. Do your own research and consult a professional, if necessary, before making investment decisions.

Source: Developing A Core Total Return Portfolio