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Darren McCammon
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Darren owns ProActive Financial LLC where he provides Financial Planning and Analysis consulting services. In addition to these consulting services, he also manages family investment accounts. Darren's education includes a Bachelors in Economics, an MBA, and a Certificate in Personal Financial... More
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  • You Must Be Crazy High Yield Portfolio - 1st Half 2014 29 comments
    Jun 30, 2014 8:10 PM | about stocks: MORL, CEFL, BDCL, SDYL, DVHL, EFF

    In this blog post I introduced readers to a real money portfolio I created using UBS 2x ETN's (http://seekingalpha.com/instablog/379412-darren-mccammon/2860573-a-high-yield-portfolio-using-ubs-2x-etns). Due to the high yield and leveraged nature of the portfolio I called it the You Must Be Crazy (YMBC) High Yield Portfolio. This is an update of that portfolio through the first half of the year:

    (click to enlarge)

    As you can see, so far so good. The chart of the portfolio goes upward and to the right at a fairly steady pace outperforming the S&P 500 by 14% YTD.

    During the quarter two transactions were made in the portfolio. Per plan, Q1 dividends were re-invested in whichever component had performed the worst up to that point in time; BDCL in this case. Second when MORL climbed over 20% in price, significantly reducing its' discount to NAV, that components' allocation was reduced back to normal (see comments section of previous post linked above). The proceeds were invested in EFF. This both reduces the expected yield of the portfolio to 14.7% and reduces it's overall risk (EFF is the only non-leveraged component of the portfolio and unlike the other components, benefits from short term interest rate increases).

    The portfolio as of June 30th:

    As far as risk goes, as I indicated the line in the chart above moves up and to the right at a fairly steady pace. However, to be more formal:

    • Annualized Volatility: 10% for YMBC vs. 10.7% for SPY
    • Daily VaR (99%): 1.5% for YMBC vs. 1.6% for SPY
    • Beta: .71 for YMBC vs. 1.0 for SPY

    http://bit.ly/1sFvKv7

    1 year annualized volatility, Value at Risk, and Beta scores all came out less risky than the SPY. So by common measures the YMBC portfolio is proving less risky than the S&P 500 despite utilizing 2x leveraged ETN's and having a very high yield. The greatest contributors to reducing market risk in my opinion are EFF and MORL, both of which have essentially no correlation to SPY (.3 to -.3 depending on what period of time and frequency you choose to utilize for the calculation).

    Also of note, during the quarter I did an analysis of the risk inherent in the MORL component vs. your average mREIT.

    Something to think about:

    • NLY: Dividend 10.3%, Volatility* 12.9
    • AGNC: Dividend 11.0%, Volatility* 12.3
    • CYS: Dividend 14.5%, Volatility* 17.3
    • WMC: Dividend 17.9%, Volatility* 21.8
    • MORL: Dividend 24.5%, Volatility* 13.9

    * http://bit.ly/1pQW3MU

    My conclusion is the added diversification of MORL appears to be significantly offsetting the 2x leverage risk. To date we are getting 2x the dividends without more volatility than the average mREIT.

    Disclosure: The author is long MORL, CEFL, BDCL, SDYL, DVHL, EFF.

    Additional disclosure: As I am not aware of your personal financial situation, this is not a recommendation for purchase or sale of any security. Please do your own due diligence. Equities discussed may be thinly traded, if you do decide to buy shares you may wish to consider using a limit order.

    Stocks: MORL, CEFL, BDCL, SDYL, DVHL, EFF
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Comments (29)
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  • ComputerBlue
    , contributor
    Comments (1150) | Send Message
     
    Which of the names you've mentioned do you prefer?
    30 Jun 2014, 09:37 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (2765) | Send Message
     
    Author’s reply » That is a hard question to answer as it is more about the overall portfolio than any one component. I do not currently have a strong preference; thus the recent reduction in MORL to normal weight. As things currently stand the Q2 dividend would go into EFF as the lowest returner YTD but BDCL is within 1% of it so it could be either one by the time the dividend actually arrives.
    1 Jul 2014, 03:41 AM Reply Like
  • Cash King
    , contributor
    Comments (1125) | Send Message
     
    Great article. I am long all three. If rates move up at a slow but relatively consistent pace starting in the next couple of years how do you think these three will perform?

     

    Thanks!
    30 Jun 2014, 09:38 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (2765) | Send Message
     
    Author’s reply » All of the components except EFF would be hurt by interest rate increases. However, maybe not as much as one assumes. MORL for instance contains a few members who do fine or even increase in value when interest rates increase. Similarly, many of the BDC's in BDCL lend at floating rates and so are also fine when interest rates increase. Including dividend re-investment, I would say the overall portfolio could continue to make money were the rise to be both slow and well telegraphed.
    1 Jul 2014, 03:57 AM Reply Like
  • Cash King
    , contributor
    Comments (1125) | Send Message
     
    Darren,

     

    That was the same conclusion I came to. Thanks!
    1 Jul 2014, 07:57 AM Reply Like
  • JCCIII
    , contributor
    Comments (762) | Send Message
     
    Darren, congratulations on an excellent 1st half of 2014. As I am sure you know, the interest rate on the 10-year is now approaching about 0.5% lower than it was at the end of 2013. This was a fortuitous period to have been invested in the YMBC portfolio.
    1 Jul 2014, 10:52 AM Reply Like
  • Darren McCammon
    , contributor
    Comments (2765) | Send Message
     
    Author’s reply » Thanks. The questions of course will be what happens when rates rise? Unfortunately, not all these ETN's existed in 2013 so I can't use that rising rate period as a formal backtest. However, it's pretty clear that after re-investing dividends the portfolio would have made money in 2013. SDYL had an extremely good year.

     

    MORL was the worst performer in 2013 and would have received the dividend re-investments but would already be starting to pop back up before the year ended.

     

    So far, I like what I see.
    1 Jul 2014, 01:50 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (2765) | Send Message
     
    Author’s reply » Bill Gross upped his personal shares in closed-end funds from $140M to $200M. "I love 'em," Gross, 70, said about closed-end funds in a June 19 interview in Chicago. "If you can borrow cheaply and lend like a bank, it's the perfect time for a new neutral to allow for relatively safe alpha creation," he said, referring to market-beating performance.

     

    MORL, BDCL, CEFL all borrow cheaply and lend like a bank. You think he saw my blog posts here and decided to copy cat me? Glad to be of help Bill. :)
    3 Jul 2014, 01:16 PM Reply Like
  • kes5126
    , contributor
    Comment (1) | Send Message
     
    This is probably one of the most creative articles. Do you recommend reinvesting the dividends monthly or doing a quarterly analysis and choosing the underperforming fund?
    4 Jul 2014, 03:50 AM Reply Like
  • Darren McCammon
    , contributor
    Comments (2765) | Send Message
     
    Author’s reply » Thanks for the comment.

     

    What I do for myself is a quarterly analysis generally investing the dividends in whichever part of the portfolio has been doing the worst. The idea is to buy low and let the dividends sell high. As I don't know you particular circumstances I can't make recommendations for your portfolio (yes, that was for the lawyers).
    6 Jul 2014, 09:32 PM Reply Like
  • Stevlg
    , contributor
    Comments (856) | Send Message
     
    I have followed and held all before xcpt. EFF and SDYL and their
    mo. div.s show on Yahoo/fin. only 1/2 of what you state...
    where is the discrepancy ?
    Good article and thanks.
    s
    4 Jul 2014, 02:24 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (2765) | Send Message
     
    Author’s reply » Monthly dividend paying components will frequently not have a correct yield showing in Yahoo. My guess of why this is, is that some of the members in SYDL for instance pay monthly while most pay quarterly. This creates abnormal dividends of about 19¢ mid quarter and 24¢ at end of quarter which Yahoo's computer has trouble with. An easy way to estimate the true annual dividend is take the last quarters worth of dividends (2 smalls and 1 big), add them up and multiple by 4.
    6 Jul 2014, 09:39 PM Reply Like
  • ReaperLynx
    , contributor
    Comments (208) | Send Message
     
    Good article, thanks. I've been following CEFL and DVHL waiting for a dip. Since I am already long MORL, which would you recommend starting another position in CEFL or DVHL or both?

     

    Thoughts?

     

    Best Regards,
    Reaper
    5 Jul 2014, 02:05 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (2765) | Send Message
     
    Author’s reply » Both CEFL and DVHL offer diversification for someone holding MORL but I don't know the rest of your portfolio or particular circumstances so I can't speak for your particular situation.

     

    For myself, I think the combination as presented in the entire portfolio offers the best combination of diversification, yield, risk control and potential reward.
    6 Jul 2014, 09:41 PM Reply Like
  • ReaperLynx
    , contributor
    Comments (208) | Send Message
     
    Thank you Darren for the reply!

     

    Best regards,
    Reaper
    9 Jul 2014, 02:40 PM Reply Like
  • bobzic
    , contributor
    Comments (145) | Send Message
     
    Darren, what do you about adding some $LMLP at your portfolio for more diversification (and $SLVO) ?
    I am long $CEFL $MORL $BDCL $LMLP.
    6 Jul 2014, 10:24 AM Reply Like
  • Cash King
    , contributor
    Comments (1125) | Send Message
     
    I think you mean MLPL?
    6 Jul 2014, 04:15 PM Reply Like
  • bobzic
    , contributor
    Comments (145) | Send Message
     
    No, $LMLP. It is new.
    6 Jul 2014, 05:58 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (2765) | Send Message
     
    Author’s reply » LMLP didn't exist when I put this portfolio together. I thought about MLPL but decided not to for now. DVHL already has some MLP's, I have MLP's in another non-IRA portfolio (where I can get the tax benefits) and I think most of the MLP's are overpriced. So I don't want to weight too much in MLP's.

     

    I do own a little SLVO in another portfolio (note SLVO is a covered call selling silver shares ETN). However, I didn't want to get too complicated and wanted to stick to the 2x UBS ETN's as much as practical. In the end I decided I made the one EFF exception as an attempt to mitigate the key known risk I see for this portfolio, rising interest rates.

     

    I considered SLVO as something that might offer some inflation protection and produce a yield. However, in the end I decided the covered call selling largely negated any significant inflation protection it might have offered. If silver prices go up sharply in a high inflation scenario, SLVO holders probably will not benefit from those rising prices. They sold the upside and any increase in volatility benefit off when they sold the covered calls.
    6 Jul 2014, 09:47 PM Reply Like
  • liusing
    , contributor
    Comments (971) | Send Message
     
    I own a little GLDO as well (it moves very much like SLVO), I think it may not be a good hedge to YMBC portfolio, but the high monthly distribution is attractive to me and I think it should be very stable as it benefits from both ups and downs of gold.
    8 Jul 2014, 02:31 AM Reply Like
  • Darren McCammon
    , contributor
    Comments (2765) | Send Message
     
    Author’s reply » I think you mean GLDI. It's a bit of an overstatement to imply covered call funds benefit when the price of the underlying asset goes down. They take the hit just as if you held the same holdings without the covered call selling feature. However, to offset some of those losses, you get the income from the covered calls. Overall, I agree that this does somewhat reduce volatility.
    8 Jul 2014, 05:09 PM Reply Like
  • liusing
    , contributor
    Comments (971) | Send Message
     
    Yes, GLDI, the key is what's always true; get in only when it is really low. Gold and silver would never turn zero.
    9 Jul 2014, 10:09 AM Reply Like
  • party2998
    , contributor
    Comments (53) | Send Message
     
    Darren, why would you not use futures to mitigate risk of rising interest rates?
    8 Sep 2014, 08:14 AM Reply Like
  • Darren McCammon
    , contributor
    Comments (2765) | Send Message
     
    Author’s reply » I only use futures and options on rare occasions. You have to get not only the direction right buy also the timing.
    11 Sep 2014, 04:12 PM Reply Like
  • clf99
    , contributor
    Comments (91) | Send Message
     
    This is a great portfolio idea. Love it.
    9 Sep 2014, 05:09 PM Reply Like
  • beehive215
    , contributor
    Comments (2) | Send Message
     
    Darren:
    Now that we've had a couple of "stress tests" of the YMBC portfolio in QIV,any probable modifications for QI '15?
    Thanks,Lee
    15 Dec 2014, 10:32 AM Reply Like
  • Darren McCammon
    , contributor
    Comments (2765) | Send Message
     
    Author’s reply » I dropped CEFL and over-weighted BDCL (you can see this posted in further YMBC blog posts and there comments). Other than that no major changes, though I will say I wish I could find an oil sector preferred ETF to add. Lot's of individual preferred bargains in that space which I'm adding to other accounts but I'm trying to keep YMBC simple.
    15 Dec 2014, 04:06 PM Reply Like
  • gcohen1720
    , contributor
    Comments (16) | Send Message
     
    We're all waiting to see how the portfolio finished the year?

     

    What are the final returns?

     

    What can we expect for 2015?

     

    I remain on the sidelines until further verification of YMBC !

     

    GC
    2 Jan 2015, 02:17 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (2765) | Send Message
     
    Author’s reply » I'm on vacation and will probably write an article in the next few weeks.

     

    The short version is the YMBC portfolio ended 2014 up 13.1% vs. 11.4% for the S&P 500 and 3.5% for the Russell 2000. It produced about 15.8% in yield, 2% of which I took as an RMD, with the other 13.8% re-invested. I continually added dividends back into the poorest performer, BDCL throughout the year. This was effectively trying to catch a falling knife as BDCL kept making new lows. Then I purposely over-weighted BDCL even more at the end of the year. This turned out to be horrible timing as PSEC, the largest component of BDCL, cut it's dividend the next trading day.

     

    I am satisfied with overall 2014 performance. Despite poor re-investment, YMBC beat both the S&P 500 and the Russell 2000 while producing a double digit yield.

     

    YMBC goes into 2015 significantly over-weighted in BDCL, 30%. I am ok with that as I think of the UBS 2x ETN potential choices, the BDC's are the cheapest. However, it is more concentrated than I ever considered the portfolio getting, so I may modify the strategy to put a cap on the size of any one component.
    4 Jan 2015, 02:38 PM Reply Like
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