Last year was a good year for my "Savvy Senior" portfolio (Curious about the name? Go here) with an overall 20% total return (cash yield plus capital appreciation), of which 10.8% (more than half the total return) came from actual cash that could be re-invested.
As an income investor my main priority is maximizing the cash output of my "income factory" (i.e. my investment portfolio), so the current weighted average "going forward" yield on the portfolio of 11.7% looks pretty attractive to me.
My investment focus over the past quarter has been two-pronged:
· Doing the standard "tweaking" of the portfolio that I do constantly, primarily rotating out of closed end funds that have done so well that their discounts have shrunk or even gone to premiums, and into funds that represent a better current value because their yields are higher and/or their discounts are larger. I emphasize current value because every time I rotate out of fund X and into fund Y people start asking: "Don't you like X anymore?" and the answer almost invariably is that I like it as much as ever, but because everyone else seems to like it its price has gone up, its yield has fallen and its discount is less, all of which makes it temporarily less attractive than some other closed end fund that is not currently so popular. Fellow Seeking Alpha author Douglas Albo sometimes refers to the irrationality and inefficiency ("insanity" even) of the closed end fund market and it is precisely that irrationality and inefficiency that allows us to find constant relative value plays between one fund and another.
· At the same time, I have been trying to identify factors that may make the future (especially with a Trump presidency) radically different and deserving of a change in my basic strategy (as outlined in many previous articles: most recently here and here).
· I concluded there are lots of things to be concerned about in the future, and which will lead to a potentially volatile geopolitical and economic environment. In general, I think there is more reason to fear TEMPORARY SHOCKS (terrorist attacks, flare-ups in global trouble spots, etc.) to the market that will influence market prices, then there is to fear LASTING SHOCKS to the economy or economic system. (I give my reasons for believing this down below in the article.) This reinforces my commitment to a strategy that focuses on maintaining and growing income flow and tries to ignore market price changes as much as possible.
First, let's review the tweaking I did to the portfolio. I lightened up on the following funds:
· Eaton Vance Limited Duration (NYSEMKT:EVV). I still own a lot of EVV and love it as a core holding. But it had risen by about 7% since I bought it and its yield was down to 7.5%, still attractive but less than some alternatives, like Avenue Income Credit Strategies (NYSE:ACP), with its 10.6% yield and 11.3% discount, which I added. They are not identical funds by any means, but still represent high yield loans and bonds, with experienced portfolio managers.
· First Trust Specialty Financial Opportunity Fund (NYSE:FGB). One of my favorite funds and a great way to own business development companies (BDC), with the advantage of diversification and professional management. I lightened up a bit (but it's still a major holding) because FGB had risen 16% from what I bought it for, the yield at 9.6% is still good but not as high as some other opportunities, and the discount that had once been 10% had changed to a premium of 4%.
· I sold Guggenheim Strategic Opportunity Fund (NYSE:GOF) and basically swapped into the Guggenheim Enhanced Equity Strategy Fund (NYSE:GGE). Both funds have broad mandates and some of the same portfolio management team, and GGE has a slightly higher yield (12% versus 11.11%) and a big discount (-9.62%) versus GOF's 2.56% premium.
· I also sold some of my Master Limited Partnership funds: Kayne Anderson Midstream Energy (NYSE:KMF), Kayne Anderson MLP Investment (NYSE:KYN) and Nuveen Energy MLP (NYSE:JMF), all of which I bought last year when MLPs were unduly beaten down because of the plunge in energy prices. Having enjoyed the recovery, which has lowered yields and discounts, I felt it was time to cash in and re-deploy some of the capital. I will probably continue to cash out of this sector, given JMF is now at a premium and KYN continues to approach par. Meanwhile I added a position in an ETF - AMZA (NYSEARCA:AMZA) that focuses on MLPs and has a higher yield (18%, but some of it is capital gains dependent). AMZA is riskier and depends on its managers executing an aggressive investment strategy. We will watch it closely and see how it does.
In general, I believe, somewhat cynically, that Rex Tillerson (who I oppose as Secretary of State for lots of reasons; here's why it will probably be very good for the oil industry, since the interests of the State Department and "Big Oil" will be essentially aligned. The 1950s adage that "what's good for General Motors (NYSE:GM) is good for America" will be back in vogue, but with a different industry.
And I added or increased the following positions:
· ACP, GGE and AMZA, as mentioned above
· Miller Howard High Income Equity (NYSE:HIE), which carries an 11.14% yield, and a 6% discount, although the discount was higher back when I first started buying it. (See Left Banker's articles on HIE for more details. Here's the most recent.) A well-run, value-oriented income fund.
· Eaton Vance Risk Managed Dividend Equity (NYSE:ETJ). There are lots of good Eaton Vance (NYSE:EV) hedged equity funds, but ETJ, with a 12.26% distribution and priced at a 9.5% discount, is reputed to be one of the most defensive of all of them, which seems like a good idea at a time when the market is at an all-time high. Given my philosophy of trying to ignore market ups and downs and focus on income, of course, I'm actually more interested in its distribution than in its defensiveness. (Note: Since buying it late last month ETJ has had a nice run-up, but I see Douglas Albo expressed some reservations about it in a recent comment, so I may re-consider it as a longer term hold. Caveat emptor!)
· Brookfield Global Listed Infrastructure Fund (NYSE:INF). I started a small position but will be adding to it gradually. Pays a 10.8% dividend and carries a discount of 8.75%. (It's risen a bit since I started buying it, but still looks attractive.). Brookfield is a smart outfit and I believe in infrastructure and utilities as a core portfolio element, when the entry price is right. In the past I have used Duff & Phelps Global Utility (NYSE:DPG) and Cohen & Steers Infrastructure (NYSE:UTF) as my favorite infrastructure/utility investments, but their yields of 8.1% and 8.7% don't match that of INF, despite their big discounts (-11% and -14%, for UTF and DPG respectively).
Moving from the Micro to the Macro
Big picture issues (and non-issues). Like everyone, I've been scratching my head to try to figure out what a Trump presidency will be like, and what I should worry about (and not worry about) as an investor. In an article shortly after the election, I speculated about how much of Trump's campaign was just "locker room talk" and how much he actually meant to do as president. To that must be added, how much he may want to do but Congress may not go along with.
Given Trump's tendency to shoot from the hip and to be intellectually undisciplined and inconsistent in his approach to policy, we can expect lots of surprises and global flare-ups as enemies (terrorist groups and governments) and even our friends test us or even just make mistakes that lead to misunderstandings because of the absence of clear policies.
This may mean jumpier markets, and the challenge will be sorting out the temporary shocks that represent NO REAL ECONOMIC DANGER and are merely buying opportunities, from events or policy changes that DO REPRESENT ECONOMIC DANGER and a threat to our investment portfolio's underlying income stream. Some examples of both:
· Terrorism will probably rise. Trump-branded golf courses, hotels, resorts, office buildings, casinos and other properties will be magnets for terrorist attacks around the world, especially those in countries having less intensive security profiles than in the United States or Western Europe. Attacks on some "Trump" branded targets in non-US locations may become lower-risk, lower-budget ways for terrorist groups to attack President Trump without having to launch such an attack in the US. The big question will be whether a President Trump keeps his cool and treats an attack on a property in a third-world country the same whether it has his name on it or not, or whether he takes it personally and orders in the Marines. If he takes it personally and ups the ante just because his name is on the building, then ISIS and other radicals will have learned how to get a 9/11-type reaction from the US without even coming near our country, an advantage they can use if their goal is to ratchet up worldwide conflict and confrontation.
· Terrorist attacks in the US raise a different question. How measured and controlled will President Trump's reaction to such an attack be? Will he be calm and unite the country, like President Bush right after 9/11 (visiting a mosque, etc.)? Or will he heed calls from his right-wing base for martial law, or round-ups by ethnic group, etc.? How destabilizing to our country and economy such an attack will be depends as much or more on our leaders' response as to the nature of the attack itself.
· Trade Wars. If President Trump were to follow through on his threat to put tariffs on imports from countries to which American companies transfer jobs, that could torpedo the economy (our own and the rest of the world's). (And imagine the litigation and trying to prove whether particular goods were made by workers with jobs transplanted from the USA versus workers whose jobs were more "indigenous.") Retail prices at Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and thousands of other stores that sell imported products would jump by the amount of the tariff. Other countries would follow suit, and a trade war would result. Fortunately this is unlikely, since most members of Congress studied enough history and economics to know how the Smoot-Hawley tariff contributed to the Great Depression and will not want to repeat it. (Just to avoid a host of comments, let me acknowledge that there is substantial disagreement over how much or how little the Smoot-Hawley tariff contributed to the Great Depression. But I believe there is consensus that it didn't help the situation, and that such a tariff war would definitely harm our current global economy, where national economies are far more inter-dependent than back in 1930.)
· So instead we will see the president use " jawboning" and the "bully pulpit" to persuade, threaten and cajole companies thinking of moving production and jobs overseas. And it will probably work. Just as Nixon's strong anti-communist credentials gave him the political "cover" to initiate relations with the Chinese Communists (something any Democrat at the time would have been pilloried by the GOP and the "China Lobby" for doing), a Republican AND a businessman like Trump will be able to get away with attacks on business corporations that any Democratic president would have been excoriated as "anti-business" for doing.
In general I foresee the mainstream Republicans and the Democrats in Congress being a bit of a "brake" on a Trump administration attempt to do anything too radical or outside the mainstream as far as economic policy is concerned. In my recent article (referenced above) I mentioned how the combination of a big tax cut (which may get passed) and some sort of increased spending for infrastructure and job-promotion could actually result in a policy more Keynesian than the intended supply-side approach the GOP may desire. Again, we shall have to wait and see.
All of which suggests to me that an investment program focusing on maximizing the income stream and ignoring as much as possible short-term price fluctuations continues to be the way to go, and the portfolio tweaks described above are consistent with that.
"Maximizing the income stream" for me means (as my readers know):
· Diversification among lots of companies and funds so I am spreading my bet over lots of different corporate management teams and lots of different portfolio managers, all with their own "skin in the game" to manage through whatever unknowns are thrown at them
· Closed end funds as my preferred investment vehicle because they (1) are quirky and unpredictable in terms of sometimes random price movements that provide you attractive entry points (i.e. discounts from their NAVs); (2) avoid "runs on the bank" in market downturns and/or if liquidity dries up in certain asset classes (i.e. no direct forced redemptions by shareholders, like traditional open-end mutual funds), and (3) afford modest leverage at institutional interest rates (1-2%) generally unavailable to retail investors (especially IRA investors). And with interest rates still likely to remain relatively low by historical standards, with an upward sloping yield curve and many assets that are floating rate and/or low duration, leverage should continue to increase returns on my type of portfolio
· "Show me the money" type investments, where you get most or all of your income in cash on a current basis (high yield bonds, corporate loans, business development companies, MLPs and other high dividend vehicles) and all the company has to do is "stay alive" and pay its debts (or continue its dividend if it is a utility)
So that is my strategy at this point, and my current portfolio (below). As usual, I'd like to thank my fellow Seeking Alpha authors who do a lot of the heavy analytical lifting in identifying and evaluating candidates for our portfolios; especially Left Banker, Douglas Albo, Sean Dougherty, Stanford Chemist, Alpha Gen and many others.
|Savvy Senior Portfolio 01/04/2017||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||14.31%||-3.28%||17.15%||17.19%||-0.04%|
|Cohen & Steers CEF Oppty Fund||FOF||8.82%||-9.91%||7.17%||7.19%||-0.02%|
|Calamos Global Dynamic Income Fund||CHW||11.93%||-14.96%||6.13%||6.15%||-0.02%|
|First Trust Specialty Financial Oppty Fund||FGB||9.60%||1.11%||5.55%||6.73%||-1.18%|
|Pimco Dynamic Credit Income Fund||PCI||9.64%||-4.08%||5.09%||6.05%||-0.96%|
|Voya Global Equity Dividend||IGD||10.86%||-13.26%||5.02%||6.27%||-1.25%|
|LMP Capital & Income||SCD||9.25%||-14.30%||4.86%||4.87%||-0.01%|
|Miller/Howard High Income||HIE||11.14%||-6.00%||3.30%||1.91%||1.39%|
|Pimco Income Strategy Fund||PFL||10.22%||-2.31%||3.00%||3.01%||-0.01%|
|Allianz Diversified Inc. & Conv. Fund||ACV||10.59%||-11.64%||2.95%||2.96%||-0.01%|
|Allianz Convertible & Income II||NCZ||11.79%||-4.56%||2.86%||2.86%||-0.01%|
|Eaton Vance Risk Mgd Div Equity Fd||ETJ||12.26%||-9.53%||2.85%||0.00%||2.85%|
|ETFIS InfraCap MLP ETF||AMZA||18.77%||NA||2.67%||0.00%||2.67%|
|Eaton Vance Tax Mgd Global Div Inc Fund||EXG||12.03%||-10.24%||2.63%||2.64%||-0.01%|
|Nextpoint Credit Strategies Fund||NHF||10.37%||-9.80%||2.59%||3.11%||-0.53%|
|Oxford Lane Capital||OXLC||22.56%||7.85%||2.49%||0.00%||2.49%|
|Allianz Convertible & income||NCV||12.07%||-5.83%||2.47%||2.48%||-0.01%|
|Eaton Vance Limited Duration||EVV||7.62%||-9.90%||2.26%||7.20%||-4.94%|
|Macquarie/First Trust Global Infra Fund||MFD||10.34%||-12.42%||2.22%||0.56%||1.65%|
|Blackstone GSO Strategic Credit Fund||BGB||8.19%||-8.67%||1.92%||1.92%||0.00%|
|Pimco Income Strategy Fund II||PFN||10.05%||-2.16%||1.80%||1.81%||0.00%|
|UBS ETRACS Leveraged REIT||MORL||20.30%||NA||1.61%||1.62%||0.00%|
|Nuveen Energy MLP||JMF||9.41%||0.84%||1.55%||2.38%||-0.83%|
|Avenue Income Credit Strategies||ACP||10.60%||-11.28%||1.54%||0.00%||1.54%|
|Calamos Conv Oppty & Income||CHI||10.99%||-3.14%||1.47%||1.48%||0.00%|
|Calamos Conv & High Income||CHY||11.21%||-5.77%||1.29%||1.29%||0.00%|
|Kayne Anderson MLP Inv Co||KYN||11.31%||-1.66%||1.20%||2.84%||-1.64%|
|Guggenheim Enhanced Equity Strategy||GGE||12.00%||-9.62%||1.16%||0.41%||0.76%|
|Ares Dynamic Credit Allocation Fund||ARDC||8.03%||-12.22%||0.95%||0.96%||0.00%|
|Yield Shares ETF||YYY||10.27%||NA||0.92%||0.92%||0.00%|
|Rivernorth CEF Opportunities Fund||RIV||8.85%||-5.00%||0.70%||0.68%||0.02%|
|Brookfield Global Listed Infra Fund||INF||10.80%||-8.75%||0.64%||0.00%||0.64%|
|Kayne Anderson Midstream Energy Fund||KMF||0.00%||-10.23%||0||1.77%||-1.77%|
|Guggenheim Strategic Oppty Fund||GOF||0.00%||2.56%||0||0.77%||-0.77%|
|Weighted Average Yield||11.71%|
Disclosure: I am/we are long AMZA, ACP, FGB, EVV, GGE, HIE, ETJ, INF.
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.