'Savvy Senior' Non-Heroic, 'Muddle Through' Strategy Returns 20% For First 9 Months (8% In Cash)

by: Steven Bavaria


With so much political and economic uncertainty, I am not inclined to change from my "keep your head down and collect the money" approach.

Fortunately that strategy - betting on horses to finish the race, rather than to win it - has worked well so far this year.

Total return 20%, but 8% of it in cash (what REALLY matters) for the first 9 months.

So steady as she goes.

Readers of last quarter's report may find this a bit boring because my outlook and strategy have not changed and I am essentially "holding the course." The elements of that strategy continue to include:

· Betting on horses to merely finish the race rather than to win it. By this I mean my focus is on credit-oriented markets and/or high dividend stocks where all the companies have to do is stay in business and pay their interest or regular dividends. For me, "staying in business" is the corporate equivalent of finishing the race. It means the company does not have to thrive or make its stockholders rich. It merely has to meet its obligations (pay its debt when due), or if it's a utility, continue to make its regular dividend payments.

· Making these "bets" primarily through the closed end fund market, where I have the advantage of:

o Diversification (I want lots of horses running in my race, and not all my money on just a few.)

o Professional management of both the funds and the underlying companies. I want thousands of people working every day to make sure their particular horse finishes the race. In other words, through thick and thin I want to know there is hard-working management with skin in the game (i.e. stock and stock options in their own companies) working to keep their companies alive through whatever economic environment presents itself, along with professional portfolio managers running the funds I'm invested in.

o Higher income because I can buy funds at a discount, so I have more assets working for me (paying me dividends) than I actually paid for.

o Leverage at low institutional interest rates. Let's face it, the artificially low interest rates of recent years have hurt savers and retail investors. But institutions that have been able to leverage themselves at low rates (1% or so) and re-invest at higher rates have done great. Closed end funds are one of the few vehicles that allow retail investors to get the benefit of this low-priced institutional leverage. The nervous nellies among our Seeking Alpha commenters who have for years bemoaned the "dangers" of leverage have left lots of money on the table as funds whose unleveraged assets paid dividends in the 5-6% range were - with the benefit of cheap leverage - actually able to pay out distributions several percentage points higher. This has provided me and many others thousands of additional dollars of income that we have been able to compound and plow back into our investment portfolios. This will continue into the future as well, even if the Fed finally manages to raise rates by 50-100 basis points over the next year or so.

If anyone wants a more thorough discussion of these points, please feel free to read last quarter's article (here).

My main point in last quarter's review was: 'The times are right now for an "all-weather," non-heroic, hunker-down-and-collect-the-cash sort of portfolio, as we anticipate a continuing "muddle through" sort of economy.'

Nothing we have seen in the past quarter or as the current quarter progresses leads me to feel particularly confident about our economic, financial or political future. More than ever I want to keep my head down, not worry about how the market values my portfolio from day to day, and concentrate on maintaining the income flow, which is the most important thing to me as one who lives on that income flow.

This approach has worked well so far this year, with cash income for the first nine months of 8.25%, and another 11.75% in capital appreciation (paper gains), for a total return of 20%. As past readers know, I take the capital appreciation with a grain of salt and focus on the 8.25% cash flow, which works out to an annualized yield of just over 11%.

Out of that cash flow I take out a portion to live on and pay my kids' college bills, and leave the rest to compound and grow. In this way I have created my own "dividend growth" portfolio, although I rely on compounding to create the growth rather than expecting my investments to provide growth on top of their already generous 11% average yields. In other words, all they have to do is keep producing that yield or close to it (and I'd be happy with even just 9-10%), and I'll take care of the growth myself through compounding.

A little aside here. Some of the dividend growth purists have criticized my approach in the past (see here and here), saying "how can you grow your income portfolio if you hold funds and stocks that don't actually GROW their dividends?" Of course, the answer is that if you have a stock that yields 5% per annum and then grows that dividend by 5% per annum, you will have a long-term growth rate of 10%. But if you have a stock that yields 10% per annum and doesn't grow at all, but you compound that 10% by reinvesting it, you will achieve the same thing. It's all math. The difference is what makes you feel good as an investor. My readers know that I feel better receiving the entire return in cash and creating my own "growth" by reinvesting and compounding, rather than getting a cash yield of only about half as much and relying on the company to grow its dividend in the future. It's whatever lets you sleep better at night. For me personally, "gimme the money." That way, when the market is heading south, I'm still able to increase my monthly income stream by reinvesting the cash flow, which is unaffected by changes in market value.

Portfolio highlights:

My biggest holding (i.e. biggest income generator, which is the metric I focus on, not the market value) continues to be Eagle Point Credit Co. (NYSE:ECC). With its 14% yield, experienced and highly professional management, and based on an underlying asset class (senior, secured, floating rate loans) that should do well in a rising rate environment, I am happy to have ECC anchoring my portfolio at the high end of the yield spectrum. Although in many, even most cases of ultra-high yields, the elevated yield reflects underlying credit. Interest rate, liquidity or other "real" risks, in this case I think it reflects "complexity" and limited investor knowledge more than actual risk. That makes it a great opportunity for those willing and able to figure out what the asset class and the specific fund are actually all about. With my personal background in lending and credit, augmented by some of the great analysis here on Seeking Alpha about ECC especially by Sean Dougherty, and the apparent commitment by ECC's Tom Majewski and his team to be as open and transparent as they can, I believe this is an ultra-high yield credit that many of us can hold for the long term and still sleep at night.

Two other major long-term holdings are Eaton Vance's Limited Duration Income Fund (NYSEMKT:EVV) and Cohen&Steer's Closed-End Opportunity Fund (NYSE:FOF). EVV is run by a team of solid, experienced credit market professionals at Eaton Vance who have managed money through thick and thin over many years and I have a lot of faith in their ability to manage us through whatever turmoil lies ahead politically and economically. The fund dropped its dividend slightly a couple months back, but still pays 7.73% and carries a price discount of over 10%. FOF is a nice boring little fund that pays 8.56% with a 6.7% discount and provides an opportunity to buy closed end funds at a "discount on a discount" since you are getting the double discount of FOF's own net asset value benefiting from the discount at which it holds many of the funds in its own portfolio, on top of the market value discount to that NAV that you receive when you buy it. I explained this in detail in an article a couple years ago.

I increased my position in Voya Global Equity Dividend (NYSE:IGD) with its 12.8% yield and 8.27% discount as I rotated out of some funds like Duff&Phelps Global Utility (NYSE:DPG) and Cohen&Steers Infrastructure (NYSE:UTF) that had done very well for me but seemed to offer less yield and upside potential than they had a year ago.

I also added some new funds that had gotten good write-ups here on Seeking Alpha and looked like attractive opportunities. These included: NexPoint Credit Strategies (NYSE:NHF), which is sort of a credit hedge fund and yields 13% while selling at a 9% discount; RiverNorth Opportunities Fund (NYSE:RIV), distributing 8.4% at a slight discount of 1.96% (although a bit more when I bought it) as another vehicle for finding inefficiencies and opportunities in the closed end fund market; and several funds from the Calamos (NASDAQ:CHI) (NASDAQ:CHY) and Guggenheim (NYSE:GGE) (NYSE:GOF) fund families. Many switches in and out of funds, as I have said before, do not reflect an inherent change of opinion about one fund or another, but merely a rotation from what may have once been a higher yielding, higher discounted fund that is no longer priced so attractively to another one that seems to offer greater value (yield and discount) at this point in time.

The entire portfolio is listed below, with changes from a quarter ago. Thanks for all your comments and especially, thanks to my fellow Seeking Alpha contributors for all your great ideas and analysis.

Savvy Senior Portfolio 10/15/2016 Symbol Current Yield CEF Premium/ Discount This Holding As % of Portfolio Income This Holding % of Portfolio Income 3 Months Ago Increase/Decrease as % of Portfolio income
Eagle Point Credit Co. ECC 14.26% 0.66% 17.2% 17.11% 0.08%
Eaton Vance Limited Duration EVV 7.73% -10.62% 7.2% 9.07% -1.87%
Cohen & Steers CEF Oppty Fund FOF 8.56% -6.73% 7.2% 7.75% -0.56%
First Trust Specialty Finance&Financial Opportunities Fund FGB 9.86% 4.57% 6.7% 6.50% 0.23%
Voya Global Equity Dividend IGD 12.85% -8.27% 6.3% 4.20% 2.06%
Calamos Global Dynamic Income Fund CHW 11.52% -11.42% 6.15% 6.12% 0.03%
PIMCO Dynamic Credit Income Fund PCI 9.71% -6.33% 6.05% 5.70% 0.35%
LMP Capital and Income SCD 9.47% 13.99% 4.9% 4.85% 0.02%
Nextpoint Credit Strategies Fund NHF 13.08% -9.31% 3.11% 0.00% 3.11%
PIMCO Income Strategy Fund PFL 10.33% -2.34% 3.0% 1.71% 1.30%
Allianz Diversified Inc. & Conv. Fund ACV 10.97% -12.16% 3.0% 2.23% 0.73%
Allianz Convertible & Income Fund II NCZ 11.90% -1.53% 2.86% 2.85% 0.01%
Kayne Anderson MLP Inv Co KYN 11.48% 0.37% 2.8% 1.13% 1.71%
Eaton Vance Tax Mgd Global Div Inc Fund EXG 11.20% -4.07% 2.6% 2.47% 0.17%
Allianz Convertible & income NCV 11.61% 1.97% 2.48% 2.47% 0.01%
Nuveen Energy MLP JMF 10.67% -4.54% 2.38% 2.37% 0.01%
Blackstone/ GSO Strategic Credit Fund BGB 8.47% -11.06% 1.9% 3.54% -1.62%
Miller/Howard High Income HIE 11.51% -2.34% 1.91% 1.90% 0.01%
Pimco Income Strategy Fund II PFN 10.30% -2.71% 1.8% 2.62% -0.82%
Kayne Anderson Midstream Energy Fund KMF 9.86% -9.52% 1.77% 1.24% 0.53%
UBS ETRACS Leveraged REIT MORL 22.96% NA 1.62% 1.61% 0.01%
Calamos Conv Oppty & Income CHI 11.37% -7.04% 1.5% 0.00% 1.48%
Calamos Conv & High Income CHY 10.98% -4.12% 1.3% 0.00% 1.29%
Ares Dynamic Credit Allocation Fund ARDC 8.41% -14.30% 1.0% 1.57% -0.61%
Yield Shares High Income ETF YYY 10.10% NA 0.9% 0.90% 0.02%
Guggenheim Strategic Oppty Fund GOF 11.23% 4.74% 0.77% 0.00% 0.77%
RiverNorth Opportunities Fund RIV 8.40% -1.96% 0.68% 0.00% 0.68%
Macquarie/First Trust Global Infra Fund MFD 9.97% -12.18% 0.56% 0.51% 0.05%
Guggenheim Enhanced Equity Strategy GGE 12.29% -9.47% 0.41% 0.00% 0.41%
100.0% 90.43% 9.57%
Positions eliminated
Duff & Phelps Global Utility Fund DPG 6.62%
Cohen & Steers MLP MIE 1.19%
Tortoise MLP Fund NTG 1.07%
Cohen & Steers Infrastructure Fund UTF 0.69%

Disclosure: I am/we are long RIV, GOF, GGE, FOF, EVV, ECC, NHF, IGD.

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.

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