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Summary

  • The Buy-The-Dip High-Yield portfolio turned in a strong 1H 2014 performance thanks to market optimism and falling interest rates boosting the performance of both equity and income assets.
  • On an absolute basis, the portfolio gained 13.91% (27.83% annualized) net of fees and taxes, competitive with most underlying indexes. After accounting for leverage, the portfolio gained 11.81% (annualized 23.63%).
  • The portfolio was relatively active and made around 75 trades this half-year.
  • The portfolio yielded 8.97% annualized on a 6-month trailing basis, or 7.62% if leverage is accounted for.

Introduction

The "Buy-The-Dip' High-Yield" (BTDHY) portfolio is designed to be relatively active, buying the dips on high-yield securities in order to enhance total return. In a previous article in this series, I presented the rationale for choosing the different asset classes of the portfolio: REITs, mREITs, BDCs, MLPs, high-yield bonds and others (including CEFs).

This article details the H1 2014 performance of the BTDHY portfolio. Furthermore, the performance of the BTDHY is compared with the underlying indexes and the outlook of the portfolio for the near future is presented.

Portfolio on January 1st 2014

The inception of the portfolio was on January 1st 2014. The stock names, tickers, number of shares, cost basis and value of the stocks are presented below. The price is not shown since it is the same as the cost basis (as the portfolio was incepted at the same time). The stocks are categorized by asset classes as listed in my previous article, and are ranked in terms of decreasing % allocation.

%Portfolio

Security

Ticker

#

Cost basis

Value

 

REIT (30.32%)

    

4.36

Realty Income

(NYSE:O)

19

37.32

709.08

3.95

American Realty Capital Properties

(NASDAQ:ARCP)

50

12.85

642.50

3.37

Extra Space Storage

(NYSE:EXR)

13

42.12

547.56

3.11

KBW Premium Yield Equity REIT Portfolio

(NYSEARCA:KBWY)

17

29.71

505.07

3.07

CBRE Clarion Global Real Estate Income Fund

(NYSE:IGR)

63

7.92

498.96

2.87

Whitestone REIT

(NYSE:WSR)

35

13.35

467.25

2.51

Lexington Realty Trust

(NYSE:LXP)

40

10.21

408.40

2.38

Omega Healthcare Investors

(NYSE:OHI)

13

29.8

387.40

2.37

UMH Properties, Inc

(NYSE:UMH)

41

9.41

385.81

2.33

AVIV REIT

(NYSE:AVIV)

16

23.7

379.20

 

mREIT (8.51%)

    

4.67

2x Leveraged Mortgage REIT ETN

(NYSEARCA:MORL)

40

19

760.00

2.47

ARMOUR Residential REIT, Inc.

(NYSE:ARR)

100

4.01

401.00

1.37

Javelin Mortgage Investment

(NYSE:JMI)

16

13.92

222.72

 

BDC (8.11%)

    

3.79

Prospect Capital

(NASDAQ:PSEC)

55

11.22

617.10

2.39

Fifth Street Finance

(NASDAQ:FSC)

42

9.25

388.50

1.92

American Capital

(NASDAQ:ACAS)

20

15.64

312.80

 

MLP (11.09%)

    

3.81

2x Alerian MLP Infrastructure Index

(NYSEARCA:MLPL)

11

56.35

619.85

3.76

Neuberger Berman MLP Income Fund Inc

(NYSEMKT:NML)

32

19.09

610.88

3.52

Calumet Specialty Products Partners, L.P.

(NASDAQ:CLMT)

22

26.02

572.44

 

Bond (19.47%)

    

6.35

Western Asset Emerging Markets Debt Fund

(NYSE:ESD)

60

17.2

1032.00

4.87

Pimco High Income Fund

(NYSE:PHK)

68

11.64

791.52

3.38

Stone Harbor Emerging Markets Income Fund

(NYSE:EDF)

30

18.31

549.30

2.44

PIMCO Corporate&Income Opportunity Fund

(NYSE:PTY)

23

17.29

397.67

2.44

Guggenheim Build America Bonds Managed Duration Trust

(NYSE:GBAB)

20

19.82

396.40

 

Other (22.51%)

    

5.29

EV Tax-Managed Global Diversified Equity Income Fund

(NYSE:EXG)

86

10.01

860.86

5.06

EV Tax-Managed Global Buy-Write Opportunities Fund

(NYSE:ETW)

68

12.11

823.48

4.90

2xLeveraged Closed-End Fund ETN

(NYSEARCA:CEFL)

30

26.59

797.70

4.79

2xLeveraged Diversified High Income ETN

(NYSEARCA:DVHL)

30

25.95

778.50

2.46

Duff&Phelps Global Utility Income

(NYSE:DPG)

21

19.08

400.68

     16264.63

The starting value of the portfolio was $16,264.43. Taking into account the fact that some of the ETNs are 2X leveraged, the total dollar value controlled by the portfolio is $19,220.68. This means that the portfolio is inherently leveraged by about 18%. Note that I did not consider the leverage used by certain CEFs in this calculation for two reasons: i) The leverage used by the CEFs is relatively low, at about 20-30% (except for PHK at 40%+), and ii) for the fund-of-funds CEFL, it is tedious to track down and calculate the weighted average of the leverage ratios of the individual components. Therefore the total dollar value controlled by the portfolio estimated here might be slightly understated.

Trades

A list of buy trades a presented below. To save space, the table has been condensed into two columns.

Buy dateTicker#PriceBuy dateTicker#Price
1/10MAIN1034.045/2KYN1436.90
1/10IGR78.005/7ELRC3415.09
2/14ACAS2014.685/7KKR1822.25
2/24HVPW2325.495/7PSEC1210.57
2/25PSEC611.015/9MAIN929.05
2/25ROIC2714.715/9PSEC2710.11
2/27CCG508.355/12HCT539.80
3/3KYN1435.905/14ARP2719.49
3/7HTGC10014.435/14PSEC259.80
3/7APU1441.815/19ARCP1312.84
3/7KYN436.405/20HCT259.45
3/7HTGC2913.595/20ELRC1614.94
3/11OXLC3417.025/21ARCP2212.56
3/17ARCP4014.405/23GHY2217.66
3/20ARCP1613.68    
3/18MAIN533.896/3PSEC1009.65
3/28SDR357.306/10UDF9919.75
4/1TGC2913.596/11ARCP2211.99
4/9ARCP913.486/17EXG8610.16
4/11MAIN831.256/18SIR1828.80
4/15KKR1821.896/24CEFL629.60
4/16HCT9910.196/24DVHL728.30
4/23HTS2019.77    

A list of sell trades is given below. For the sell trades, the cost basis, dividends received, P/L (total return) and %P/L (total return) are also given.

Sell DateTicker#Buy priceSell priceDividendsP/L%P/L
1/21PTY2317.2918.662.6934.208.60
1/27DPG2119.0818.463.33(9.69)(2.42)
1/27ARCP5012.8513.98 56.508.79
2/13JMI1613.9214.561.8812.125.44
2/13EXR1342.1247.2 66.0412.06
2/7ARR1004.014.3 29.007.23
3/7WSR3513.3514.548.4950.1410.73
3/10HTGC6014.4314.79 21.602.49
3/12HTGC4014.4315.22 31.605.47
3/13CLMT2226.0224.7412.81(15.35)(2.68)
3/21UMH419.419.56.279.962.58
3/21AVIV1623.724.595 14.323.78
3/28SDR357.38.05 26.2510.27
4/1ACAS4015.1615.8 25.604.22
4/8LXP4010.2110.795.6128.817.05
4/17ROIC2714.7115.73.6730.407.65
4/22APU1441.8144.927 43.647.46
4/22KKR1821.8923.61 30.967.86
4/29O1937.3243.4511.76128.2318.08
4/29OHI1329.834.8810.9476.9819.87
4/29EDF3018.3119.1618.3643.867.98
4/29PHK6811.6412.7128.16100.9212.75
5/2HCT9910.1911 80.197.95
5/9KBWY1729.7132.37.5351.5610.21
5/12KKR1822.2522.823 10.312.58
6/17ETW6812.1112.8528.178.429.52
6/23GBAB2019.7721.914.156.7014.34
6/24FSC429.39.5717.8229.167.47
6/24HTS2019.7719.88 2.200.56
     181.511144.63 

The total value of realized gains (including dividends for the sold stocks) in H1 2014 was $1144.63.

Portfolio on June 30th 2014

The table below shows the status of the portfolio at the end of H1 2014. The total cost (= number of shares * cost basis) and market value (= number of shares * market price) of the securities were part of my Excel table but these columns were removed to reduce the table to a more manageable size. The % allocation of portfolio shown in the first column is a more useful metric for comparison with other investors anyway. The P/L is a total return and is calculated by: (market value - total cost) + dividends. The %P/L is calculated by: P/L divided by total cost.

%SecurityTicker#Cost basisPriceDivsP/L%P/L
 REIT (22.55%)       
7.18American Realty Capital PropertiesARCP12213.3112.5315.65(78.91)(4.86)
3.99American Realty Capital Healthcare Trust, Inc.(NASDAQ:HCT)789.6910.893.7597.5212.91
3.00CBRE Clarion Global Real Estate Income FundIGR707.939.1116.0898.8217.81
2.51Select Income REIT(NYSE:SIR)1828.8029.63 14.942.88
2.45Cohen&Steers Total Return Realty Fund(NYSE:RFI)4212.2712.39 5.040.98
2.04Campus Crest Communities, Inc.(NYSE:CCG)508.358.6614.0229.527.07
1.39Omega Healthcare InvestorsOHI835.3436.87 12.244.33
 mREIT (13.47%)       
9.07United Development Funding IV(NASDAQ:UDF)9919.7519.5011.5(13.25)(0.68)
4.402x Leveraged Mortgage REIT ETNMORL4019.0023.4081.63257.6333.90
 BDC (18.11%)       
6.25Prospect CapitalPSEC12510.6210.6348.649.383.72
4.95Main Street Capital(NYSE:MAIN)3231.9532.9323.8655.125.39
2.70Oxford Lane Capital(NASDAQ:OXLC)3417.0216.9237.5734.175.90
2.20Hercules Technology Growth Capital(NYSE:HTGC)2913.5916.167.6482.1720.85
2.01FS Investment Corporation(NYSE:FSIC)4010.2710.67 16.003.89
 MLP (16.20%)       
4.44Kayne Anderson MLP Investment(NYSE:KYN)2436.2439.389.5684.859.75
3.642x Alerian MLP Infrastructure IndexMLPL1156.3570.3226.00179.6728.99
3.03Neuberger Berman MLP Income Fund IncNML3217.8520.1617.1491.0615.94
2.57Atlas Resource Partners, L.P.(NYSE:ARP)2719.4920.284.4325.764.90
2.52Martin Midstream Partners L.P.(NASDAQ:MMLP)1340.0841.18 14.302.74
 Bond (9.15%)       
5.18Western Asset Emerging Markets Debt FundESD6017.2018.3736.72106.9210.36
2.10Nuveen Floating Rate Income Fund(NYSE:JFR)3711.8112.09 10.362.37
1.87Prudential Global Short Duration High Yield Fund, Inc.(NYSE:GHY)2217.6618.052.3410.922.81
 Other (20.52%)       
8.37EV Tax-Managed Global Diversified Equity Income FundEXG17210.0910.3641.5988.895.12
5.002xLeveraged Diversified High IncomeDVHL3725.9528.7442.59145.8215.19
4.502xLeveraged Closed-End FundCEFL3627.0926.5961.6543.594.47
2.65U.S. Equity High Volatility Put Write Index ETF(NYSEARCA:HVPW)2325.4924.5114.36(8.18)(1.40)
      516.681454.356.89

The total cost basis of this portfolio is now $20,339.08, up from $16,264.63. After taking into account the realized gains of $1144.63 in H1 2014, the amount of additional capital injected into the portfolio in H1 2014 was $2,929.82. This number will likely increase in the future as more money is added to the portfolio.

The market value of the portfolio at the end of H1 2014 was $21,276.75. Adding dividends(#) but deducting brokerage fees(^), the portfolio is sitting on current gains of $1,401.85. Together with the realized gains of $1144.63, the total return of the portfolio in H1 2014 was $2,546.48.

(#The dividends are reported net of taxes, which are taxed at a flat withholding rate of 15% for international investors with a dividend tax treaty with the US. There is also no capital gains tax for international investors).

(^The portfolio made about 75 trades in H1 2014. As the commission for each trade at Interactive Brokers costs around 70c, the total brokerage fees were estimated to be $52.50, or about 0.29% of the average portfolio cost over this period).

Performance and comparisons

As the amount of capital invested in the portfolio varied continually, it would be inaccurate to use the starting portfolio value as a basis for the calculation of total return percentage (since capital invested after the start date would be earning interest immediately). However, I did not keep track of my daily invested capital. Therefore, I chose to use the average of the initial and final total cost values of the portfolio as the denominator for calculating total return percentages. This figure turns out to be $18,301.86. If leverage is taken into account, the average value of the dollar value controlled by the portfolio is $21,553.41.

Using this basis, the total return of $2460.66 in H1 2014 corresponds to a total return percentage of 13.91%. If leverage is taken into account, the percentage gain was 11.81%.

Moreover, the total amount of dividends received in H1 2014 was $698.20, net of taxes. This works out to be 3.81% or 3.24% of the portfolio value, with the latter number taking into account the leverage of the portfolio. This means that the portfolio was yielding about 7.63% (or 6.48%) in H1 2014, on an annualized basis, net of taxes. Before taxes, the annualized yield was 8.97% (or 7.62%).

Many of the asset classes in the BTDHY portfolio were undeniably buoyed by falling interest rates in H1 2014 (viz. the 7-10 Year Treasury Bond ETF (NYSEARCA:IEF) gained nearly 5% including dividends). How does the performance of the portfolio compare to the underlying asset classes? The table below presents total return percentage values (from YCharts) in H1 2014 for the underlying indexes: REITs (NYSEARCA:VNQ), mREITs (NYSEARCA:REM), BDCs (NYSEARCA:BDCS), MLPs (NYSEARCA:AMLP) or (NYSEARCA:AMJ), high-yield bonds (NYSEARCA:JNK) and CEFs (NYSEARCA:YYY). Returns for the broader market (NYSEARCA:SPY) and a multi-asset income ETF (NYSEARCA:CVY) are also shown.

Ticker%Return
VNQ17.75
REM16.12
BDCS2.63
AMLP11.24
AMJ17.21
JNK2.96
YYY10.68
SPY7.98
CVY7.47
Average10.45
BTDHYP (not accounted for leverage)13.91

BTDHYP (accounted for leverage)

11.81

The H1 2014 returns for those index ETFs are also presented graphically.

VNQ Total Return Price Chart

We can see that even with leverage accounted for, the BTDHY portfolio has performed comparably with the underlying indexes. It outperformed BDCS, AMLP, JNK, YYY, SPY and CVY, but underperformed VNQ, REM and AMJ. It outperformed the average of the underlying indexes by about 3.5% (not accounted for leverage) or 1.4% (accounted for leverage).

Changes in portfolio composition

The changes in portfolio composition of the different asset types in H1 2014 are presented below.

TypeStart / %End / %Difference /%
REIT30.3222.55(7.77)
mREIT8.5113.474.96
BDC8.1118.1110.00
MLP11.0916.205.11
Bond19.479.15(10.32)
Other22.5120.52(1.99)

These changes reflect my own investment outlook for the near future. With rates falling to near one-year lows, I decided to harvest profits on some of my REITs and bonds, thus reducing allocations in these classes to 22.55% (from 30.32%) and 9.15% (from 19.47%), respectively. Moreover, my opinion is that the US and global economy are recovering along nicely, and this should provide favorable tailwinds for BDCs and MLPs, which have had their allocations increased to 18.11% (from 8.11%) and 16.20% (from 11.09%), respectively. Furthermore, MLPs are also a great way to play the ongoing energy revolution in the US.

Note that the 4.96% increase in mREIT allocation this H1 2014 was largely due to a play on United Development Funding IV to gain a quick 4% gain from the tender offer. SA Pro subscribers may see New Capital's article here.

Conclusion and outlook

The portfolio gain of 13.91% or 11.81% (accounted for leverage) in H1 2014 represents an annualized performance of 27.83% or 23.63%, respectively. As a result, the BTDHY portfolio managed to slightly outperform the majority of the underlying indexes over this time period, even when accounting for leverage, taxes and brokerage fees.

What is the outlook for the BTDHY portfolio in 2H 2014? Note that the performance of this portfolio was aided by an unlikely confluence of events: both equities and treasury bonds rallying at the same time. The former is supportive of BDC and equity CEF prices, while the latter is especially supportive of REIT, mREIT and high-yield bond prices. Thus, all asset classes of the BTDHY portfolio provided positive returns in H1 2014. However, given the historically negative correlation between treasury bonds and equities, one should not necessarily expect the same phenomenon to occur in the coming half-year.

Possible scenarios for the BTDHY portfolio are presented below, with my own estimated probabilities of occurrence.

  • Best case (10% probability): Equity markets continue a steady march upwards while treasury yields continue to fall. All asset classes in the portfolio benefit. Predicted annualized returns of portfolio: 20% or higher.
  • Moderate case #1 (30% probability): Equity markets continue a steady march upwards while treasury yields reverse course and begain to rise. REITs, mREITs and bonds suffer. Predicted annualized returns of portfolio: 0-10%.
  • Moderate case #2 (30% probability): Equity markets undergo a significant correction (20%+) while treasury yields continue to fall. BDCs and equity CEFs suffer. Predicted annualized returns of portfolio: 0-10%.
  • Moderate case #3 (20% probability): Equity markets and interest rates hold steady. Returns therefore equal to dividend or bond yields. Predicted annualized returns of portfolio: 5-10%.
  • Worst case (10% probability): US economy enters another recession and liquidity crisis. All asset classes in the portfolio crash. Predicted annualized returns of portfolio: -50% or lower.

On a six-month trailing basis, the portfolio yielded 8.97% annualized on a before-tax basis, or 7.62% if leverage is accounted for. While I have not calculated the present yield of the portfolio, because the constituents (and their yields) are continually in flux, I expect broadly similar yields to be achieved in the coming half-year.

The next article in this series will comment on individual buy/sell transactions of the portfolio in H1 2014, especially on particular "buy-the-dip" trades that managed to boost the returns of the BTDHY portfolio over the performance of the underlying indexes, even after accounting for leverage, taxes and brokerage fees. Stay tuned!

Source: Buy-The-Dip High-Yield Portfolio: First Half Of 2014 Performance