Protected Principal Retirement Strategy: Finalizing The Bear Market Portion Of The Portfolio

by: Akaralph

"It's not the end of the world, but I can see it from here". For the life of me, I cannot remember where I first heard that. I thought it was Bugs Bunny or perhaps lyrics to a song.

Either way, I have been scrambling to finalize positions to incorporate into the Protected Principal Retirement Strategy portfolio should a steep market correction ensue. I don't think we are quite at that point as of yet, but it never hurts to be ready.

Before I discuss the stocks/closed-end funds [CEFs]/mutual funds that I have decided upon, let's review the current portfolio's holdings and decide on what we will retain, and what we plan to sell. In my article that appeared on SA (here), I provided an update on first quarter portfolio performance. You can refer to this article for clarification of the next few paragraphs.

What We Would Retain

With the possible exception of Alon USA Partners (NYSE:ALDW), we plan on keeping all of our master limited partnerships [MLPs]. At this point all of them are either maintaining or increasing distributions. Since all are presently in the process of announcing distributions for the current quarter, I reserve the right to selectively sell if any distributions are cut.

Besides, in most cases we have owned most of the MLPs for several years, and the price basis on each is very low, which could create a significant tax burden. During the bear market (10/09/2007 - 3/09/2009) we held several and were rewarded with increased distributions and the opportunity to double down on some at levels up to 50 percent of where we originally purchased them.

We also plan to retain the four royalty trusts Chesapeake Granite Wash Trust (NYSE:CHKR), Sandridge Permian Trust (NYSE:PER), Eagle Energy Trust (ENYTF.PK) and Freehold Royalty (OTCPK:FRHLF). I continue to believe that with the world situation being what it is, there is always the chance for a spike in prices of the underlying commodities.

What We Would Sell

I love our two business development company [BDC] positions: Medley Capital (NYSE:MCC) and Prospect Capital (NASDAQ:PSEC). However, during a bear market, BDCs tend to get destroyed. That being said, I would not hesitate to sell either, or both.

Other Positions

That leaves us with the "Other" category. This category is comprised of two drillers Seadrill (NYSE:SDRL) and North Atlantic Drilling (OTCPK:NATDF), and one shipping company Ship Finance International (NYSE:SFL). The drillers are a tough choice, since they are closely tied to each other, and heavily influenced by John Fredriksen, whose management strategies I very much like.

At this point, I would probably sell and retain the drillers; however, depending on the amount declared for the current quarter's distributions, this too could change.

Bear Market Portfolio Additions

We are presently at a cash position of about 10 percent of our portfolio. Adding to that the cash we would receive from those positions that we liquidate, our cash position would increase to about 25 percent. In prior articles (here), (here), (here) and (here), we discussed several bear market strategies which I have refined to select what I consider today to be a few of the best possible alternatives for our portfolio.

I have culled the list of CEFs to four:

MFS Intermediate Income (NYSE:MIN) - As I have discussed in prior articles, MIN has had only two down years in its history, and is a solid bear market performer - up 13 percent in 2008. Its portfolio consists of short and intermediate term debt instruments (only three percent of which are U.S.). It yields about eight percent (a monthly payer); however, the present downside is that it sells at a 6.6 percent premium to its net asset value [NAV]. Until it gets closer to a discount, I cannot buy it.

BlackRock Income Trust (NYSE:BKT) - Also covered in a past article was BKT. During the last bear market, it was up 12 percent. Its portfolio presently consists of government bonds (leveraged), primarily U.S. mortgages. Current yield is around seven percent (also a monthly payer), and it is selling at a 3.2 percent discount to NAV.

Eaton Vance Risk-Managed Diversified Equity Income (NYSE:ETJ) - I covered ETJ in my most recent article. ETJ was up by just over six percent in the last bear market. It owns U.S. large cap stocks and it is using options strategies to enhance performance and income generation. At its recent price, the yield is at 10 percent (another monthly payer), and it is selling at a discount of 10.65 percent.

Nuveen Global Government Enhanced Income (JGG) - The final CEF component of the bear market portfolio will be JGG. It invests primarily in government and corporate bonds, 43 percent of which are in the U.S. JGG was up 7.7 percent in 2008, and is currently selling at a 7.6 percent discount to NAV. At its present price, the yield is 8.27 percent.

I would include two mutual funds as portfolio additions, despite low (or zero yield).

PIMCO StocksPlus Short Strategy A (MUTF:PSSAX) - PSSAX shorts the S&P 500 stock index. It has a 3.75 percent front-end load (I'm not the happiest about this), and the minimum purchase is $1,000. What I do like is that it generated a 47 percent return in 2008.

Grizzly Short Fund (MUTF:GRZZX) - GRZZX shorts individual stocks, so in combination with PSSAX, we could get the best of both "shorting" worlds. It requires a $10,000 minimum investment in a taxable account; however, this is reduced to $1,000 for IRAs. During the year 2008, it returned 74 percent.


As I watch the market unfold (unwind) today (Monday) I am getting closer to moving on one or more of these portfolio candidates. I would be reluctant to initiate positions in either of the two bear market mutual funds until I was more certain of market direction. However, I like ETJ under $11, and JGG under the $14 level.

Disclosure: I am long ALDW, CHKR, PER, ENYTF.PK, OTCPK:FRHLF, MCC, PSEC, SFL, OTCPK:NATDF, SDRL. 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.

Disclaimer: This article does not constitute either a buy or sell recommendation for any of the stocks or funds mentioned.

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