How Savvy Seniors Beat Hedge Funds

Includes: CHW, DPG, FOF, JQC, UTF, UTG
by: Steven Bavaria

I recently had a discussion with a friend of mine who manages money for a hedge fund. The conversation was very illuminating, and also convinced me - once again - that savvy individual investors can beat the big institutional professionals if we make use of the advantages we have.

The primary advantage we have is our small relative size, and the ability that gives us to buy and sell smaller stocks, closed-end funds and other asset classes that would not be of interest or would be just too small to make a difference to the performance of a large institutional manager. Readers of my other articles know that one of my key strategies is to have a constantly updated list of high dividend stocks, closed-end funds, REITs and other investment "candidates" that I stand ready to invest in when I have dividends to re-invest, or when closed-end funds or other holdings I already own reach premium price levels where it seems prudent to take profits and rotate to less pricey names on the list. Many of these investments have market caps far too small to be of interest to hedge funds and other large fund managers who move in million dollar and multi-million dollar blocks, but they can easily handle my investment moves typically measured in the ten to fifty thousand dollar range. A few current names on the "approved candidate" list include: Calamos Global Dynamic Income Fund (NASDAQ:CHW), Duff & Phelps Global Utility (NYSE:DPG), Nuveen Credit Strategies (NYSE:JQC), Cohen & Steers Infrastructure (NYSE:UTF), Reaves Utility Income Fund (NYSEMKT:UTG), and Cohen & Steers Closed End Opportunity Fund (NYSE:FOF).

The other big advantage we have is that most of us have only one client - ourselves and our family - that we have to satisfy, not a whole bunch of jumpy pension funds, endowments and other institutions who have to justify their choice of investments and investment managers to their own investment boards and constituents at the end of every quarter. My friend the hedge fund manager told me that he and his colleagues have to make every move with an eye on how it will impact the current quarter's performance. This leads to a lot of "momentum" type investing (What's going up? How do I jump on the bandwagon while it's still moving up?) rather than investment that focuses on what sort of income will this investment generate for me over the long term.

On the other hand, I am fortunate to be able to concentrate totally on my own goal - maximizing income over time, with a heavy emphasis on cash income (i.e. yield). As I mentioned in a recent article, I try to pay less attention to the market swings in the valuation of my portfolio, and focus instead on constantly increasing the cash income that the portfolio generates (both current and future projected income). That even allows me to look on downturns in a positive light as an opportunity to re-invest at lower cost and higher yield, rather than as a totally negative experience.

So far, this approach seems to be working well, and as a 65 year old retiree who has to "eat his own cooking" as an investment manager (and pay college bills!), I hope it continues. Using my "actively managed, income-focus" approach, my IRA portfolio returned 11.68% for the first 8 months of the year (17.5% annualized), of which the yield (cash income received) was 4.61% (6.9% yield, annualized), and the 8-month capital appreciation was 7.07% (10.6% annualized). While I'm delighted to see that capital appreciation, I realize that price movements are ephemeral and could move the other way next week. It's the absolute amount of the cash income that I manage to, seeking to grow it continually over time. That's a luxury my hedge fund friend doesn't have.

Disclosure: I am long CHW, FOF, UTF, UTG, JQC, DPG. 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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