Protected Principal Retirement Strategy: Playing Defense - Man To Man Or A Zone

Feb. 26, 2013 10:25 AM ETBKT, FMY, MIN, JGH9 Comments
Real-Time Retired Guy profile picture
Real-Time Retired Guy

For the life of me, I simply cannot get my arms around market direction. I take heart in the fact that no one else seems to be able to do this either. It appears that for every article claiming we remain in a bull market there is one that claims we remain in a bear market and the past few years are nothing but a bump.

I am trying to prepare for a downturn, just in case. Unfortunately, the wonderful folks in charge in Washington D.C. are of no help (what else would one expect), coming up with one created crisis after another - the latest being "sequestration." And I always thought that's what happened to jurors hearing an important case.

Anyway, here is my take on things as we approach March 1, and where I stand on researching and identifying a few possible positions that might withstand a precipitous drop in the market averages.

Market Outlook

I personally do not see "sequestration" having a long-term adverse impact on the markets. We are talking $22 billion here, not trillions (as we should be). We might get a temporary tank, but nothing of great concern.

However, I do think at some point the averages are going to either have a 10 - 15 percent correction, or possibly tank to levels seen in early 2009. Right now, I am thinking (and hoping) for the former.

What Can One Do

I see many articles (on SA and other financial sites) expounding the need to move to defensive stocks should the markets crater. My personal experience is that in a savage bear market virtually everything goes down, it is just a matter of how big a hit one can accept.

In the bear market of 2008 - 2009 I personally bailed on just about everything save the master limited partnerships [MLPs]. I watched many of them get cut in half; however, most of the best continued to increase, or maintain distribution levels - and I doubled down on many of them. Today, most have not only recovered, but have prices above pre-bear market levels, and I have lower basis prices and double-digit yields.

Since I rely on their consistent income, I would probably follow a similar strategy in another market correction.

I recently wrote an article on MFS Intermediate Income Trust (MIN) (here). In this article I extolled the virtues on this closed-end fund, and told how it weathered past bear markets with a positive total return. When I wrote the article it was selling at a 3 percent premium, a point where I would consider buying in if the markets were in decline. However, since the publication of this article, the premium on MIN has expanded to almost 6 percent - taking it out of my purchase range. Hopefully, the premium will narrow (or disappear) if we get signs of a coming correction, or new bear market.

Other Potential Candidates

Over the weekend, I spent considerable time delving into closed-end funds and mutual funds that have the capability for positive returns should a new bear market rear its ugly head.

Blackrock Income Trust (BKT) - BKT is a closed-end fund seeking capital preservation and high income. It focuses on (heaven forbid) mortgage backed securities. But, unlike the mortgage real estate investment trusts [mREITs], not only did it survive the 2008-2009 debacle, but it was quite profitable. In 2008, its price increased by 12 percent and the net asset value [NAV] was up by just over 9 percent. Looking at 2009, the price increased by 13.3 percent while the NAV was up by 12 percent. BKT pays a monthly dividend of $.0405, all of which is income. Current yield is 6.8 percent. All of its holdings are rated "AAA." Certainly worth a consideration in a market storm.

First Trust Mortgage Income (FMY) - FMY is also a closed-end fund with similar objectives as has BKT. It holds asset-backed bonds, approximately 80 percent of which are investment grade. Its performance during the 2008-2009 bear market, while not as good as that of BKT, was quite decent. During 2008, the price increased by 4.5 percent while the NAV did decrease by just over 6 percent. In 2009, price and NAV performance was stellar, with the price increasing by 19.9 percent, and the NAV going up 31.7 percent. FMY currently pays $.10 monthly; however, the dividend has been reduced twice since the Summer of 2012 - so that is a word of possible caution. On the positive side, the entire dividend is income. Present yield is 7 percent. Fees, at 1.84 percent are a bit high.

Nuveen Global Government Enhanced Income (JGG) - JGG seeks current income and also capital gains. It sells at a discount to NAV of 5.5 percent and pays $.295 quarterly, of which $.20 is return of capital (arguably good, arguably bad). JGG performed well in 2008, with the price showing a 7.7 percent increase, and the NAV increasing by 5.9 percent. In 2009 the price was up by 18.9 percent and the NAV increased by only 1.8 percent. A global closed-end fund, JGG is invested 44 percent in the United States and 56 percent in international holdings (U.K., Canada, South Africa etc.). The majority of holdings are government bonds, about 78 percent of which are investment grade. The current yield is 8.1 percent.

PIMCO StocksPLUS Short Strategy (PSSAX) - A mutual fund, PSSAX uses short trades on the S&P 500 as a means to generate profits in down markets. It is managed by Bill Gross, so I guess you get the best mind that PIMCO has when you buy this one. It carries a 3.75 percent front-end load, so isn't for everyone. It also has a 635 percent annual turnover, so Mr. Gross stays quite busy. I was marginally attracted to this one by its 47 percent return in 2008. In 2009 (which included a portion of the market recovery) it did show a 14 percent loss, but if one got out right, one could have had a profit. The fund pays a small dividend. Don't think one should even look at this one unless we are clearly in a bear market.

Grizzly Short Fund (GRZZX) - GRZZX is one of many mutual funds that focus solely on bear markets to generate profits for shareholders. It is defined as a fund using a quantitative investment approach (for what that is worth). For the full-year bear market of 2008, it was up a whopping 74 percent. In 2009 it did not fare as well, dropping 47 percent. Again, I think if we enter a confirmed bear market, this might be a place to put some funds, but only until an upturn begins. GRZZX requires a $10,000 initial investment.


At the present juncture, I am not advocating any of these alternatives. For those of you who read my articles, you are aware that I am definitely not an advocate of the mREIT asset class. Based upon past performance, I would however, probably take positions in both BKT and possibly FMY should the poop hit the fan.

My hope is that positions in any of the above closed-end funds or mutual funds do not become necessary.

I would certainly entertain any other suggestions that readers might have for bear market allocations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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: This article does not constitute either a buy or sell recommendation for any of the funds mentioned.

This article was written by

Real-Time Retired Guy profile picture
Former consultant residing in beautiful northeast Georgia. Over 45 years of responsible experience in planning, finances and investment management. Primary focus is on portfolio development for retired (or nearly retired) individuals who do not possess great wealth. The Protected Principal Retirement Strategy portfolio seeks medium-high yield vehicles, including dividend stocks, Energy MLPs/C-Corps, BDC's, REITs, and Closed-End funds.

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