50/50 (BDC, mREIT) Portfolio Update And Anxiety Over Relentless Price Appreciation; Reinvestment On Hold

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Includes: AGNC, FDUS, GAIN, GSBD, IVR, LADR, MRCC, NEWT, NYMT, PFLT, TSLX
by: High Yield Investor

Summary

Most investors consider price appreciation as successful; I see it as an impediment.

This portfolio was built with rate-sensitive investments beating the S&P 500 year to date.

Reduced over-allocation on two stocks and purchased nine new stocks as a lateral asset transfer.

Price acceleration...

There is a certain anxiety associated with every investment method. My anxiety is increasing price! This is contrary to most investment methods that put their achievement and success in price appreciation. The purpose of the 50/50 portfolio consisting of BDCs (Business Development Companies) and mREITs (mortgage Real Estate Investment Trust) is to generate high income to supplement Social Security in retirement.

This investment method is to: a) collect dividend income from an asset purchased, b) withdraw between 50 to 60% of the income, c) reinvest surplus dividends to grow the income stream.

Price moving up and having a paper gain is meaningless unless you sell to capture the profit. Then comes the emotional response caused by market timing. Price increasing in value is a delusional fallacy and is just an illusion to distract me from my original intent.

Instead I want to be a reactionary investor. After a decline in the market is realized, I step in to scoop up income generating machines to add to my collection. I do not want to play the future market direction forecasting game, but take action on price dislocations. My hedging will be a cash build-up for better pricing.

If you're 15 to 30 years away from retirement price appreciation is a good thing to allow time to build up a decent size portfolio. If you're 6 years away from retirement and trying to build a dividend paycheck replacement, you want the market price to give good entry points.

Back in 2013 to 2015, when I originally started to build my portfolio using only BDCs and mREITs, price volatility was extreme. During the past few years, both asset classes took a hit during the mREIT Taper Tantrum and the removal of BDCs from the Russell index. Investing was fun buying stocks on sale, but now what happened?

This year I was expecting a continuation of the January and February price volatility to help me add additional income shares. The price action since February 11th was like a switch turned-on and all of a sudden both BDCs and mREITs were discovered for the first time.

Investors are bidding up price on these high yield stocks to levels not seen over the past few years. Could this be retirees looking for yield to supplement their portfolios? Could this be investors just throwing in the towel and realizing interest rates will remain low for years to come?

I have not invested new monies since February and have held on to cash dividends, which are substantial, waiting for the never coming market correction. Day after day, week after week, month after month, watching and waiting to redeploy cash at my perceived reasonable price. What if these high yield assets are at the beginning of a market uptrend that will continue for years?

Then I need to reset my expectations on price and reconsider my entry points. Thank goodness I have most of my portfolio built and not forced to make purchases except on my terms. At this point, I can enter 2017 and retire with enough cash flow to ease the transition.

2016 Market Performance…

Click to enlarge

The chart above illustrates my point with starting out the year in good spirits, getting income generators on sale. In January, my portfolio was down 12% and the yield was 14%. Now my portfolio is up over 20% including dividends and my yield is 11%. It's costing more to buy income these days.

As soon as this excitement started, it abruptly halted with the relentless upward climb in price for both BDCs and mREITs. This chart is displaying only price movement where the S&P 500 is up about 6.7% and the 50/50 portfolio is up about 18% as of September 2nd.

Both rate sensitive assets were being trashed over the past few years are all of a sudden the stars in many portfolios. Every minor correction in price is met with relentless purchasing. This reminds me of the technology bubble in 2000: No matter what tech company you purchased it went up. It was the relentless climbing markets making naive investors think they were smart and just kept plowing money into the market.

Yes, I am talking about myself, and to make matters worse, leverage a big NO-NO for people who do not understand price being controlled by a manic depressive market. I'm not saying this is the case this time; but I want to be cautious heading into the end of the year.

Take a look at the chart again; notice how the S&P 500 is flat since about July 18 while the 50/50 portfolio keeps climbing. It looks like the S&P 500 is building a base to perhaps start another leg up, who knows. As for the BDC and mREIT sectors, this might be the beginning of a multi-year comeback.

The reason I wanted to show this chart was to provide the reason for my hesitation to add additional shares at this point in time. September and October are naturally susceptible to increased volatility caused by summer vacations ending, and the once in a lifetime presidential rumble.

Portfolio adjustments...

In August, I made a lateral exchange in dividend stocks. What this means is the monies received in the sale were immediately redeployed into new purchases. I wanted to reduce two over asset allocations in both AMERICAN CAPITAL AGENCY (NASDAQ:AGNC) and NEW YORK MORTGAGE TRUST (NASDAQ:NYMT) and replaced them with nine other income generators.

They consist of two mREITs, INVESCO MORTGAGE CAP INC (NYSE:IVR) and LADDER CAPITAL CORP CL A (NYSE:LADR) and seven BDCs, GOLDMAN SACHS BDC INC (NYSE:GSBD), TPG SPECIALTY LENDING (NYSE:TSLX), NEWTEK BUSINESS SERVICES (NASDAQ:NEWT), GLADSTONE INVESTMENT (NASDAQ:GAIN), PENNANTPARK FLOATING (NASDAQ:PFLT), MONROE CAPITAL CORP (NASDAQ:MRCC) and FIDUS INVESTMENT CORP (NASDAQ:FDUS).

The income allocation for each one of the nine stocks is about 20%. This gives me a total of 40 companies each contributing a minimum level of income to eventually add to my total paycheck replacement. I wanted to spread out the risk of dividend cuts having a smaller impact to total income. This is prudent risk management given unforeseen economic conditions.

With this latest change, my allocation is 55% BDCs and 45% mREITs. I believe we are nowhere near a recession and the eventual increase of the fed funds rate by December will be good for business. Even with low economic growth, business will still need to borrow money to grow.

50/50 Portfolio allocation...

Type

Description

Symbol

Dec31 to Sep2 2016 Price Gain/Loss

Sep2 Yield

Asset Allocation

Income Allocation

*BDC

MONROE CAPITAL CORP.

MRCC

21.50%

8.78%

0.6%

0.49%

*BDC

FIDUS INVESTMENT CORP.

FDUS

18.00%

9.67%

0.6%

0.49%

*BDC

TPG SPECIALTY LENDING

TSLX

14.20%

8.42%

0.7%

0.49%

*BDC

GLADSTONE INVESTMENT

GAIN

19.70%

8.17%

0.7%

0.49%

*BDC

PENNANTPARK FLOATING

PFLT

15.60%

8.78%

0.6%

0.49%

*BDC

GOLDMAN SACHS BDC INC.

GSBD

13.90%

8.32%

0.7%

0.50%

*BDC

NEWTEK BUSINESS SERVICES

NEWT

-6.30%

12.05%

0.5%

0.56%

BDC

GOLUB CAP BDC INC.

GBDC

12.60%

6.81%

3.0%

1.78%

BDC

SOLAR CAPITAL LTD.

SLRC

25.20%

7.85%

3.2%

2.22%

BDC

ETRACS 2X LEV LNG WF ETN

BDCL

20.40%

15.38%

1.8%

2.43%

BDC

MEDLEY CAPITAL CORP.

MCC

1.20%

11.64%

2.5%

2.57%

BDC

APOLLO INVESTMENT CORP.

AINV

16.70%

9.82%

3.0%

2.61%

BDC

FS INVESTMENT CORP.

FSIC

10.60%

9.02%

3.3%

2.64%

BDC

TRIANGLE CAPITAL CORP.

TCAP

4.00%

9.15%

3.3%

2.65%

BDC

NEW MOUNTAIN FINANCE

NMFC

9.10%

9.58%

3.5%

2.93%

BDC

TCP CAPITAL CORP.

TCPC

18.80%

8.73%

3.9%

3.00%

BDC

HORIZON TECHNOLOGY

HRZN

15.90%

10.15%

3.4%

3.04%

BDC

TRIPLEPOINT VENTURE

TPVG

-5.40%

12.74%

2.9%

3.20%

BDC

HERCULES TECHNOLOGY

HTGC

12.90%

9.06%

4.2%

3.31%

BDC

STELLUS CAPITAL

SCM

17.00%

12.00%

3.3%

3.51%

BDC

THL CREDIT INC.

TCRD

-4.60%

13.43%

3.2%

3.78%

BDC

ARES CAPITAL CORP.

ARCC

15.00%

9.41%

4.8%

4.01%

*mREIT

INVESCO MORTGAGE CAP INC.

IVR

28.60%

10.24%

0.5%

0.49%

*mREIT

LADDER CAPITAL CORP CL A

LADR

10.60%

8.30%

0.7%

0.49%

mREIT

CAPSTEAD MTG CORP.

CMO

15.00%

9.30%

2.4%

1.99%

mREIT

STARWOOD PROPERTY TR INC.

STWD

12.60%

8.38%

2.9%

2.13%

mREIT

DYNEX CAP INC.

DX

17.00%

11.41%

2.4%

2.45%

mREIT

NEW YORK MORTGAGE TRUST

NYMT

13.50%

16.05%

1.8%

2.53%

mREIT

AMERICAN CAPITAL AGENCY

AGNC

12.90%

11.24%

2.6%

2.55%

mREIT

TWO HARBORS INVT CORP.

TWO

11.70%

10.37%

2.8%

2.56%

mREIT

CYS INVESTMENTS INC.

CYS

25.00%

11.43%

2.6%

2.57%

mREIT

WESTERN ASSET MORTGAGE

WMC

5.10%

18.44%

1.7%

2.72%

mREIT

BLACKSTONE MORTGAGE

BXMT

12.20%

8.35%

4.0%

2.96%

mREIT

MFA FINANCIAL INC.

MFA

18.00%

10.39%

3.3%

3.00%

mREIT

APOLLO COMMERCIAL REAL

ARI

-3.30%

11.17%

3.5%

3.45%

mREIT

ANNALY CAPITAL MANAGEMNT

NLY

16.10%

11.20%

3.6%

3.50%

mREIT

AG MORTGAGE INVESTMENT

MITT

24.70%

12.12%

3.3%

3.56%

mREIT

ARLINGTON ASSET

AI

14.10%

16.85%

2.4%

3.59%

mREIT

NEW RESIDENTIAL INVT CORP.

NRZ

18.80%

12.89%

3.3%

3.76%

mREIT

UBS AG ETRACS MNTHLY ETN

MORL

20.10%

20.48%

2.5%

4.42%

Click to enlarge

The 'income allocation' goal is 2.5% (2.5% * 40 = 100%) because I went to 40 income generators, last column. If market volatility picks up before the end of the year, I can achieve a 72% gross paycheck replacement. The stock 'type' name that starts with a "*" indicates the new stocks added to the portfolio in August, first column. The 2016 price Gain/Loss is reflective from the start of the year and is accurate for all individual stocks except for the new stocks purchased in August.

Conclusion...

This has not been a good year for adding income generators to the 50/50 portfolio. I was hoping for one more flat year to add dividend stocks well below book value. At this point, I'm not sure when the rate sensitive sectors I'm investing in will provide a meaningful correction to allow adding more shares.

Since February, it seems like a switch has been turned on and all of a sudden the undiscovered stocks I have been investing in over the past few years have become hot! I'll sit and wait this one out, collecting my dividends and not chasing price.

Investment Disclaimer…

Please note the stocks included in the 50/50 portfolio are not recommendations. They were personally selected by the author and contain a great deal of investment risk. The stocks in the portfolio are Business Development Companies (BDCs) and mortgage Real Estate Investment Trusts (mREITs). Both investment vehicles are Regulated Investment Companies (RICs) and are required to distribute at least 90 percent of taxable income as dividends to investors.

This is a live active IRA portfolio that I believe will withstand the markets' bull and bear movements based on my own research. The progress will be updated and tracked for feasibility of this investment method over the years. The article titled 50/50 Portfolio (BDCs And mREITs) Baseline 2014 details how the portfolio was constructed.

Disclosure: I am/we are long ALL STOCKS MENTIONED IN THIS ARTICLE.

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.