After a successful year in 2013, I began the new year feeling somewhat cautious. Readers know my philosophy is to focus on high, dependable yields that I can compound tax-deferred in my IRA, and to regard capital appreciation as icing on the cake. Last year's cash return (dividends and distributions) was 9%, with another 9% in capital appreciation, so the cake had more than its usual amount of icing. (Read about it here)
Coming off a year like that, I was prepared to be happy in 2014 if all I earned were dividends, with little or no capital appreciation. In other words, with the stock market having just risen 30% in 2013, I was hardly expecting a repeat performance. Indeed, a flat spell or even a reversal in equities seemed quite possible, particularly with the prospect of the Fed beginning to remove the proverbial punch bowl by "tapering" and, eventually, raising interest rates.
So I tweaked my portfolio a bit, but mostly hung on tight and hoped for the best. So far so good, as the first quarter ended with a total return of 3.9% (15.5% annualized), of which 2.4% (9.6% annualized) is cash yield. Total return grew even faster in April than during the first quarter, with a total return for the first 4 months of 5.95%, which would annualize to almost 18% if it kept up all year (which I hardly dare expect.)
Of course the downside in all this, for long-term income investors, is that the growth in market prices has made it increasingly harder to find good re-investment candidates for my dividends. As market prices go up, yields drop and I have to get more creative (which usually means "take more risk") if I want to keep on earning yields close to 9%.
Here are some of the thoughts that informed my portfolio moves so far this year:
· As mentioned above, the equity market might take a breather or just be "choppy" after its strong performance in 2013
· The Fed, while talking about tapering and eventually increasing interest rates, was unlikely to move too fast or too much with all the sluggishness still apparent in the economy and the labor markets
· On the other hand, the economy was improving, albeit slowly, which would be good for credit-dependent investments, like high yield bonds and business development companies ("BDCs") that lend to smaller, riskier companies
In view of this, I decided to take some of my profits in equities, especially some utility funds that had reached expensive levels, and shift into more credit-focused investments. My major moves were:
· I sold two of my Eaton Vance equity/option funds - Eaton Vance Enhanced Equity Income (NYSE:EOI) and Eaton Vance Tax Managed Buy Write (NYSE:ETV) Several commenters to my last article pointed out that I was "doubling up" by owning lots of Eaton Vance funds that owned similar portfolios. That was true, although I am a big fan of Eaton Vance and its portfolio managers. But they did seem like a likely choice to lighten up, since I had made big profits, the yields had dropped a bit from when I first bought, and I wanted to move into some other areas. I still have big positions in Eaton Vance Tax Managed Global Diversified Income (NYSE:EXG), Eaton Vance Tax Managed Global Buy Write (NYSE:ETW), and Eaton Vance Risk Managed Diversified Equity Income (NYSE:ETJ).
· I also sold completely (after reducing a bit the previous quarter) my positions in Reaves Utility Income Fund (NYSEMKT:UTG) and Cohen & Steers Infrastructure Fund (UTF). I love these funds and made a lot of money owning them (and hope to own them again someday), but with their prices having risen to the point where they were only yielding 5.7% and 6.4% respectively, I figured I could take my gains and deploy the funds profitably. (Given my goal of earning 8-9% yields. I'm not suggesting that readers with more conservative strategies should go out and sell these funds, which are terrific long-term, "buy-em-and-forget-em" holdings!)
· The money I raised from these moves, plus new money from dividends, went into mostly credit-dependent investments. The big choices we have as investors are among: (1) equity risk, (2) interest rate risk (i.e. duration risk) and (3) credit risk. Treasury and investment grade bonds are all long-term fixed rate and therefore carry about 90% interest rate risk and only a small amount of credit risk (and return). They are clear losers, looking out a few years, given the certainty that interest rates will eventually rise. That leaves the real choice between equities (stocks) and credit-dependent investments. These can be stocks that are heavily credit dependent (like BDCs), high yield bonds (which are lower duration and pay you more for the credit risk than investment grade bonds), floating rate loans, or specialized credit vehicles (collateralized loan obligations, etc.)
· In an effort to lower equity risk and lock-in high yields, I basically traded away some equity risk and replaced it with credit risk, by buying the following:
o Eaton Vance Limited Duration (NYSEMKT:EVV) - great fund that I've used in the past as a safe, "batten down the hatches" sort of fund; close to an 8% yield, discount of 6.8%,; shorter duration investments; great portfolio management team
o Black Rock Debt Strategies Fund (NYSE:DSU) - can buy both floating rate loans and high yield bonds; 7.35% yield and 7.7% discount.
o First Trust Specialty Financial Opportunity Fund (NYSE:FGB) - this closed end fund buys business development companies ; I have owned it for awhile but increased my position, especially after a number of readers pointed out that for someone who espoused credit investments I was rather light on BDCs. FGB pays a healthy 8.94% distribution and sells at a 4.9% discount.
o I also bought small individual "starter" positions in an assortment of BDCs, including Prospect Capital Corp. (NASDAQ:PSEC), Medley Capital Corp. (NYSE:MCC), Pennant Park Investment Corp. (NASDAQ:PNNT), Fifth Street Financial Corp. (NASDAQ:FSC), New Mountain Finance Corp. (NYSE:NMFC), and THL Credit Inc. (NASDAQ:TCRD). They pay dividends in the 10-11% range and should benefit if the economy continues to improve. I also own the hybrid business development company TICC Capital Corp. (NASDAQ:TICC), which successfully combines investing in CLOs with lending to small businesses.
While those were the tweaks, the overall strategy - focus on high current yield rather than growth, and emphasis on credit risk (but NOT interest rate risk) over equity risk - has remained the same. My biggest holdings continue to be:
· Oxford Lane Capital Corp. (NASDAQ:OXLC), about which I've written extensively in other articles. They surprised their shareholders by raising far more equity than they had first indicated when they announced their rights offering at the beginning of this year, but it all turned out well as shareholders who paid $17 per share to exercise their rights received the new shares a week before the ex-dividend date for a 70-cent dividend (regular plus special) that was paid in March. Although the price dipped, as expected, after the ex-dividend date, it has now climbed back up to about $16.97. So any shareholders who exercised hoping they could collect the dividend and then resell for their exercise price seem to be getting their wish. Hats off to management and their advisors for doing a pretty good job of estimating how much additional stock the market could absorb without sinking the stock price. Having raised its payout in the first quarter, OXLC pays a dividend of 14.2%
· Third Avenue Focused Credit Fund (TFCIX, TFCVX) - I still love this fund. The management buys high yield debt but with an equity mind-set, looking for undervalued opportunities. Besides the 8% yield, I've made over 12% in appreciation as the fund routinely earns capital gains from collecting at par or close to par on assets they bought at bargain basement prices.
· Pimco Dynamic Credit Income (NYSE:PCI) - lots written on Seeking Alpha site if anyone wants to research; 8.07% yield with a very nice discount, especially for a PIMCO fund; good managers.
· Cohen & Steers Closed End Opportunity fund (NYSE:FOF) - lots of people criticize this holding but to get almost an 8% yield , plus "discounts on discounts" in that you are buying it at a 10.5% discount, while the fund, in turn, buys many of its own holdings at discount. To me, that's hard to beat. And I've had steady albeit not spectacular capital appreciation since 2012-2013 when I began buying my current holding, so I know the 8% distribution has not been "destructive."
Here is my portfolio as we go to press:
|"Savvy Senior" IRA Portfolio - 4/29//2014|
|Name||Symbol||Current Yield||Premium/Discount||Total Portfolio Income % This Holding|
|Oxford Lane Capital Corp.||OXLC||14.22%||1.14%||10.40%|
|Third Avenue Focused Credit Fund||TFCIX||7.22%||-||8.56%|
|Pimco Dynamic Credit Income Fund||PCI||8.07%||-5.38%||7.98%|
|Cohen & Steers Closed End Opportunity Fund||FOF||7.93%||-10.57%||6.24%|
|Eaton Vance Tax Mgd Global Diversified Income||EXG||9.70%||-7.02%||5.54%|
|Eaton Vance Tax Mgd Global Buy Write Fund||ETW||9.54%||-5.99%||5.17%|
|Duff & Phelps Global Utilities Income Fund||DPG||6.89%||-12.38%||4.30%|
|Eaton Vance Limited Duration||EVV||7.93%||-6.84%||4.14%|
|Eaton Vance Risk Mgd Diversified Equity Income||ETJ||9.96%||-8.94%||3.88%|
|Black Rock Debt Strategies Fund||DSU||7.35%||-7.69%||3.66%|
|Credit Suisse High Yield||DHY||9.00%||1.27%||3.20%|
|Allianz NFJ Dividend Interest & Premium Strategy||NFJ||9.84%||-1.40%||3.13%|
|Nuveen Equity Premium Advantage Fund||JLA||8.05%||7.94%||2.99%|
|Calamos Global Dynamic Income Fund||CHW||9.20%||-9.96%||2.67%|
|Wells Fargo Advantage Global Dividend Fund||EOD||9.00%||-9.19%||2.66%|
|First Trust Specialty Financial Oppty Fund||FGB||8.94%||-4.88%||2.63%|
|Nuveen Preferred Income Oppty Fund||JPC||8.00%||-9.53%||2.60%|
|Nuveen Real Asset Income & Growth||JRI||8.50%||-6.77%||2.47%|
|John Hancock Pref Income||HPI||8.33%||-4.82%||2.37%|
|Wells Fargo Advantage Income Oppty Fund||EAD||8.64%||-5.79%||1.56%|
|Western Asset High Income Fund||HIX||8.96%||-0.74%||1.35%|
|BlackRock Multi-Sector Income Trust||BIT||7.66%||-8.19%||1.09%|
|Apollo Tactical Income Fund||AIF||7.80%||-8.95%||1.01%|
|Helios Multi-Sector Income Fund||HMH||9.00%||-4.01%||0.90%|
|ING Global Advantage Fund||IGA||9.53%||-8.70%||0.74%|
|First Trust Strategic High Income Fund||FHY||8.96%||-7.16%||0.65%|
|Ares Multi Strategy Income Fund||ARMF||8.28%||-8.26%||0.64%|
|Prospect Capital Corp.||PSEC||12.20%||-||0.51%|
|Medley Capital Corp.||MCC||11.00%||-||0.46%|
|Pennant Park Investment Corp.||PNNT||11.00%||-||0.43%|
|Fifth Street Financial Corp.||FSC||10.40%||-||0.42%|
|New Mountain Finance Corp.||NMFC||9.50%||-||0.38%|
|THL Credit Inc.||TCRD||9.70%||-||0.38%|
|Weighted Average Portfolio Yield||9.26%|
Disclosure: I am long EXG, ETW, EVV, ETJ, DSU, FOF, OXLC, PCI, TICC, FGB, TCRD, NMFC, FSC, PNNT, MCC, PSEC, UTF. 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.