Protected Principal Retirement Strategy: Preliminary Portfolio Re-Balancing

by: Akaralph

Recently, I have begun to re-balance the Protected Principal Retirement Strategy portfolio for 2014. To be completely transparent about the 2013 portfolio performance, I was disappointed. Year-to-date it is up about four percent, and the total return with dividends and distributions is around 13 percent. I can't really complain, but with the S&P up in the mid-20s, my returns look a bit paltry in comparison.

2013 Portfolio Summary

Let's review each of our asset classes in 2013.


Our heaviest concentration during 2013 was in the MLP sector, which was a big underperformer; however most increased distributions each quarter of 2013, and those that did not kept distributions constant. At a total weighting of 40 percent, the distributions alone proved a significant return on our invested principal.

Royalty Trusts

Aargh! We began 2013 with a weighting of 15 percent, split between the U.S. and Canadian royalty trusts. The U.S. trusts really underperformed while the Canadian ones held their own. As the year progressed, we lightened up on the U.S. trusts and maintained (or added) to the Canadian ones.


The portfolio goal at the beginning of 2013 for equity REITs was 10 percent. Since we essentially began the year with no positions, and as the months passed and the eREITs continued to decline we never attained this goal.


We didn't touch these, and have no intention whatsoever of including any in our re-balancing. If fact, I have recommended that folks invested in the mREIT sector sell for a year now. Don't think a lot of people listened to this advice.

Business Development Companies

The BDCs received a 10 percent allocation for 2013. Until recently, we held positions in two, but a week ago, I reduced the holdings to a single BDC, since net investment income for many in this sector is failing to adequately cover dividends.

Foreign Stocks

The majority of our foreign stock holdings were focused on the energy sector, primarily offshore and deepwater drilling and shipping. These performed a bit better than average. We also held a few closed-end funds that afforded diversification into international markets.

Portfolio Thoughts Going Forward

The outlook provided by investment gurus for 2014 seems to be a mixed bag; however most are in agreement that the markets will not produce anywhere near the gains generated in 2013. I agree, and if our portfolio can result in a total return equal to that of 2013, I will probably be very satisfied. Let's review our thinking going forward.


I believe that the MLP sector will re-emerge (or continue to be) as a good place to be in 2014. I personally do not see interest rates having a significant effect on this asset class. My preliminary thinking is to increase our allocation to around 50 percent, but increasing our weighting of the midstream MLPs and slightly decreasing weighting of the upstream ones. Here is the potential weighting:

  • MLPs Total Weight - 50%

Upstream - 15%

Midstream - 25%

Downstream/Specialty - 10%

Have recently been adding Marlin Midstream Partners (FISH) and Dynagas LNG Partners (NYSE:DLNG) to our other positions.

Royalty Trusts

I believe the outlook is better for Canadian royalty trusts than for the U.S. ones. We are not adding to any royalty trust positions. Here are the potential weightings for this sector:

  • Royalty Trusts Total Weight - 10%

U. S. - 5%

Canadian - 5%


I am getting optimistic that the equity REITs are bottoming. From the standpoint of our portfolio I want to gain exposure using closed-end fund selling at a discount to net asset value. We own Nuveen Real Estate Income Fund (NYSE:JRS), which holds mostly large cap REITs. It rarely sells at a discount, and I try to add each time it begins to trade at any discount. That includes today, as I am adding to our position as I compose this article.

I am considering getting back into Cohen & Steers Quality Income realty Fund (NYSE:RQI), but waiting for a better price.

We are also looking at the international REITs. At this time two have my attention: Dundee International (OTC:DUNDF), a Canadian REIT, invested in Germany (I like the outlook for the German economy going forward), and Alpine Global Premier Properties (NYSE:AWP), one with which we have had success with in the past.

Here are our proposed eREIT weightings:

  • eREITs Total Weight - 15%

U.S. eREITs - 7.5%

International eREITs - 7.5%

Business Development Companies

Based upon recent quarterly earnings reports I am leery to add to any BDCs at this point. This may change however as we move into 2014. We continue to have only one holding in this sector - TCP Capital (NASDAQ:TCPC). I am closely watching two others - Prospect Capital (NASDAQ:PSEC), which we sold a while back, and Medley Capital (NYSE:MCC), another former holding. Our BDC sector weights are 5%.

Foreign Stocks

As with prior years our international positions are divided into two parts - equity/income stocks and emerging markets. Our positions include individual stocks and closed-end funds.

Our equity stock positions include current holdings in Seadrill (NYSE:SDRL), North Atlantic Drilling (OTCPK:NATDF) and Ship Finance International (NYSE:SFL). We also have built a position in Wells Fargo Advantage Global Dividend Fund (NYSE:EOD), which gives exposure to Europe, and to Eaton Vance Tax-Managed Fund (NYSE:EXG), also affording European exposure plus the added kicker of an options strategy.

Emerging markets are, and probably will continue to be a crap-shoot, but I think a limited position at this point could be profitable. Here again, I prefer using closed-end funds as opposed to individual stocks. We own some Western Asset Global High Income Fund (NYSE:EHI) and are looking at adding some Western Asset World-Wide Income Fund (NYSE:SBW) to round out our exposure to emerging markets.


That is where we stand in the re-balancing process as of mid-December. Some of the above is subject to change/adjusting as we near year end. I will try to post another article close to New Year with the final re-balancing information.

In the meantime I wish y'all a Merry CHRISTmas and a Happy New Year!

Disclosure: I am long EOD, DLNG, EXG, OTCPK:OTCPK:NATDF, SDRL, FISH, SFL, EHI, JRS, TCPC. 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: This article does not constitute either a buy or sell recommendation for any of the stocks or funds mentioned.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Problem with this article? Please tell us. Disagree with this article? .