Inside My Portfolio: What I Hold And Why

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Includes: AGNC, ANH, BMNM, CMO, DX, EPR, FCX, FSITX, FSIVX, FSRVX, FSTVX, MO, MTGE, NLY, NNN, O, PM, RSO, SCHB, SCHC, SCHD, SCHF, SCHH, SCHZ, SLD, STOR, TGT, VNQ, VTI, WMT, XOM
by: ColoradoWealthManagementFund

Summary

I’ll take readers through a look at my personal portfolio.

November was another solid month for total returns, but the first of December was brutal.

I don’t like carrying concentrated risk to a single company, yet I’m making an exception because I believe my analysis is far ahead of what the market has achieved.

It looks like my allocation to mortgage REITs is soaring, but this isn’t the typical carry trade exposure through mREITs.

The majority of my exposure to mortgage REITs comes from the combination of one commercial mREIT and one external manager.

It is useful for readers to have a solid disclosure about the investing choices of the analysts they follow. Seeing the choices the analyst has personally made and what plans the analyst has for their future investing choices provides other investors the opportunity to better understand the mindset of the analyst and determine how they feel about the quality of the analyst's research.

Holdings

The following list contains my current holdings, recent holdings, and some of the shares that I am currently considering taking a position in. This is a fairly long list because some of the ETFs are interchangeable. Since the funds are so similar, it often makes sense to pick the ETF with favorable commission rates for that account. Since I will also use positions in preferred stock, I've listed several series of preferred stock that I keep an eye on.

Ticker

Name of Fund

VTI

Vanguard Total Stock Market ETF

FSTVX

Fidelity Spartan® Total Market Index Fund Fidelity Advantage Class

SCHB

Schwab U.S. Broad Market ETF

SCHD

Schwab U.S. Dividend Equity ETF

MO

Altria Group

XOM

Exxon Mobil

WMT

Wal-Mart Stores, Inc.

TGT

Target

FCX

Freeport-McMoRan

PM

Phillip Morris International

SCHF

Schwab International Equity ETF

SCHC

Schwab International Small-Cap Equity ETF

FSIVX

Fidelity Spartan® International Index Fund

FSRVX

Fidelity Spartan® Real Estate Index Fund Fidelity Advantage® Class

VNQ

Vanguard REIT Index ETF

SCHH

Schwab U.S. REIT ETF

NNN

National Retail Properties

STOR

STORE Capital

O

Realty Income Corp.

EPR

EPR Properties

FSITX

Fidelity Spartan® U.S. Bond Index Fund

SCHZ

Schwab U.S. Aggregate Bond ETF

AGNC

American Capital Agency Corp

AGNCB

AGNCP

ANH

Anworth Mortgage Asset Corporation

NLY

Annaly Capital Management

NLY-E

NLY-D

MTGE

American Capital Mortgage Investment

MTGEP

DX

Dynex Capital

DX-A

DX-B

CMO

Capstead Mortgage Corporation

CMO-E

RSO

Resource Capital Corporation

RSO-A

RSO-B

RSO-C

SLD

Sutherland Asset Management

OTCQB:BMNM

Bimini Capital Management

CASH

Click to enlarge

Category

Since readers requested an easier way to track allocations over time, I started putting together my "category" chart to show past months as well as current month.

Click to enlarge

Being so heavily long in mortgage REITs should be a red flag when the yield curve is moving higher and steeper at a rapid pace, but the exposure is not the typical carry trade. The allocations to mREITs that primarily trade in agency RMBS are to ANH and DX. Each of those mREITs puts a substantial portion of their portfolio in agency ARMs (adjustable rate mortgages) which benefit from the steeper yield curve.

Another position is in NLY where the mREIT has a very complex hedge portfolio that includes MSRs, IO strips (Interest Only Strips), and IIO strips (Inverse Interest Only Strips). Those assets each perform very well when prepayment expectations decline. Don't get me wrong, we could certainly be looking at a material loss in BV for the quarter. The hedges were primarily designed to protect against smaller movements in rates, but I still think some investors and analysts are overestimating the damage.

The other positions come from BMNM, which is an external manager, and RSO which is a commercial mortgage REIT. The vast majority of the assets held by RSO carry interest rates that are indexed to LIBOR. While RSO has been on a dramatic decline, I didn't buy it until after shares crashed under $8. Because I continued buying shares above $8, my average cost moved higher. My weighted average price on shares is now $8.50 (give or take a penny in rounding error). On the other hand, my investment in RSO-B has done exceptionally well and is in a large unrealized gain position. I remain confident in my research on RSO and consequently I've pushed further in on a single company than I would normally go.

Ratings

I'll take another buy rating on BMNM and RSO. I'm confident that I got these calls right.

Individual Companies / ETFs / Mutual Funds

The next chart breaks down the allocations by the actual ticker.

Click to enlarge

As I said, the allocation to RSO was huge. Over the next couple months we'll see how this plays out. If I'm wrong, I'll lose more than my reputation as one of the strongest mREIT analysts. On the other hand, if I'm right there will be an exceptional body of evidence to show that I was able to understand RSO when most investors and analysts couldn't do it.

Domestic Equity: VTI / FSTVX / FUSVX / SCHB / SCHD

These are all great ETFs / mutual funds. However, I've been stuck here a bit. I'd like to have more of this capital free to use in chasing preferred shares.

WMT / TGT / MO

Strong dividend champions with great positions within their sectors.

PM

I treat Philip Morris as an international allocation. They don't sell products domestically. When 100% of sales are international, why would anyone call it a domestic company? I don't care about the headquarters being in America. Sales are in foreign countries and made for foreign currencies.

Preferred Shares

I go hunting for bargains and with Treasury yields rising there have been a few great opportunities.

Recent Changes

I don't feel comfortable with the macroeconomic picture supporting such high domestic equity valuations. I sold off domestic equity funds on 12/1/2016 (these positions are from 11/30/2016) and moved it into medium duration bonds. I can't call when the top in yields will come through, but I don't think the current interest rate environment is the new normal.

My position in SLD closed out when a limit-sell order activated.

RSO took a harsh beating and my confidence remains intact. I have even more RSO now.

Cash

I may add some additional cash to my portfolio and as always I may buy or sell anything as changes occur in both share prices and my outlook on the investment.

Want to Know More About Mortgage REITs and Preferred Shares?

Want to know when great income investments go on sale? Consider joining The Mortgage REIT Forum. For the cost of one lunch per month, you can get access to the research I'm using for managing my own investments. On average, I publish about 3 subscription articles per week. One is for calculating new estimated book value for several mortgage REITs and finding the current discounts to those estimates. Another covers the preferred shares for each mortgage REIT that has preferred shares. The third is used to either preview articles I'm working on for the public or to provide real-time updates on liquidity failures where prices for a small number of securities detached from other similar stocks.

Disclosure: I am/we are long VTI, SCHD, MO, WMT, TGT, PM ,FSRVX, SCHH, FSIVX, FSITX, SCHZ, NLY, ANH, DX, BMNM, RSO, NLY-D, CMO-E, RSO-B.

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: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. This article is prepared solely for publication on Seeking Alpha and any reproduction of it on other sites is unauthorized. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.