'Widows & Orphans' Income Factory Update (Grannies Beat Geezers Again, Sort Of)

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Includes: AFT, AIF, ARDC, AVK, BGH, BGX, BIT, CIK, CSQ, ETY, FOF, FUND, GLO, HPS, HYB, HYT, JRS, KIO, MCI, PCI, RA, RNP, TSLF, UTF, UTG
by: Steven Bavaria
Summary

Our "Widows & Orphans" Income Factory™ did better during the past 6 months than the classic Savvy Senior version, losing just 3.36% versus 5.38% for our original portfolio.

But both portfolios came roaring back in January, and our Income Factory™ "classic" version has already eclipsed its 2018 paper loss, while churning out cash at a 12.3% rate.

Meanwhile the more "Steady Eddie" Widows & Orphans portfolio is following along behind at an 8.88% cash distribution rate, up from 8.08% six months ago.

The theory behind launching a "Widows & Orphans" version of our Savvy Senior Income Factory™ last year (link here) was that some investors might be attracted to our overall "gimme the cash" strategy, but would prefer a slightly lower risk/reward profile. Instead of attempting to double and redouble our income stream every 7 or 8 years, as we would by re-investing and compounding a portfolio yielding 9-10%, our W&O version would aim for a more modest but still attractive doubling/redoubling every 9 years or so, by investing in a diversified portfolio yielding in the 8% range.

Unlike our original Income Factory™ that represents my own personal IRA portfolio with actual "real" assets and results going back many decades, and which I have been reporting on in detail here on Seeking Alpha since 2012, our W&O portfolio is still theoretical. So I can't give an actual side-by-side real dollar comparison of the two portfolios, but I can provide a side-by-side comparison of my own actual results for the past six months with the reported results (per CEF Connect) of the Widows & Orphans portfolio, assuming an equal distribution among the 25 W&O funds.

Somewhat to my own surprise, the results so far (and it's only been a little less than a year) meet our expectations in that they support the idea that the lower-yielding W&O portfolio may be a bit less volatile, both on the downside and on the upside, than our higher-yielding Income Factory™ "classic" portfolio.

The Widows & Orphans portfolio had a loss (i.e. negative total return of cash distributions plus market depreciation) for the past six months ending January 29th, of -3.36%. By contrast, our Savvy Senior Income Factory™ had a loss of -5.38% for the six months from August 1 to January 29th. So the Grannies outperformed the Geezers on the way down. But during the past month, i.e. since the beginning of January, our Income Factory™ rocketed back up by 12.8% (completely offsetting its losses during 2018), outdistancing the more modest but still quite respectable year-to-date gain of 7.93% in the W&O portfolio.

Long-Term Prospects

Only time will tell whether this pattern of the theoretically higher risk/higher reward Income Factory™ being more volatile in both directions versus the theoretically more stable Widows & Orphans portfolio actually continues. One of my often-stated personal beliefs is that so-called "high-yield" portfolios, especially those focused more on credit risk than equity risk, can be quite stable and relatively predictable if well diversified. This is, in large part, because the "investment bet" we are making with credit portfolios as opposed to equity portfolios is a less "heroic" sort of bet in that the credit issuer doesn't have to grow or perform in an "above average" manner compared to other companies in the economy for our bet to pay off.

All it has to do is stay in business and service its debt, whereas in an "equity bet" our companies have to not only survive, but they have to excel and grow compared to their competitors and the economy as a whole (i.e. "win, place or show" as opposed to merely "finish the race").

Also, a high yield is not necessarily the "negative signal" of something bad likely to happen, like a dividend cut, the way it is in the corporate equity world. Except in certain industries (REITs, BDCs, MLPs, etc.) an unusually high dividend for a corporation may indicate problems, like an imminent earnings and dividend cut. In the credit world, such higher yields are more normal and do not typically presage problems.

Bottom line, while I feel the W&O portfolio will probably turn out to be less volatile over time than our Income Factory™ "classic" portfolio, I believe both will likely be more stable and predictable than a typical equity portfolio. I am not suggesting either of my approaches would necessarily outperform (or underperform) an equity strategy over the long term, but I think they would make downturns and bear markets a lot less scary, and decrease the likelihood of an investor "losing their nerve" or panicking during volatile periods and succumbing to the pressure to "do something" that they might regret later if the market starts back up and they are sitting on the sidelines.

In one of my favorite investing books, Winning the Loser's Game, Charles Ellis compares investing to amateur (not professional) tennis, where most points are lost by players making bad shots, not won by players making good shots. He shows how investing shows a similar pattern, with lots more money being lost by investors doing the wrong things at the wrong times than is made by investors doing particularly smart things. Having a "river of cash" coming in regardless of what the market may be doing at any point in time, which cash can be re-invested and compounded at bargain prices when the market is down, makes it easier for Income Factory™ investors - whether "classic" or "W&O" - to sit tight and resist itchy trigger fingers during downturns.

Looking ahead, the W&O portfolio currently has a distribution yield of 8.88%, up by 0.79% from 8.08% six months ago. Meanwhile the average market price discount on the funds in the portfolio increased from -6.05% to -8.33%. Having 8% more assets working for us and paying us distributions than we actually had to pay for is, of course, one of the big advantages of investing in closed end funds. It's a particularly big advantage for long-term income investors since, even if the discount gap never closes, we have the advantage, continuing indefinitely, of more assets working for us than we originally paid for and being available for re-investment at those discounted prices.

Savvy "Widows & Orphans" Portfolio - January 29, 2019
9/1/2018 1/29/2019
Asset Class Fund Name Fund Symbol Distribution Rate Discount Distribution Rate Discount 6 Mo. Total Return to 1/29/2019 YTD Total Return 2019 Distribution Rate Change Discount/ Premium Change
Senior Loans Ares Dynamic Credit Allocation (ARDC) 8.12% -10.38% 8.96% -14.35% -5.70% 5.06% 0.84% -3.97%
Blackstone/GSO LS Credit (BGX) 7.48% -4.17% 9.44% -7.00% -5.69% 8.30% 1.96% -2.83%
Apollo Tactical Income (AIF) 7.94% -9.40% 8.95% -12.72% -2.41% 4.90% 1.01% -3.32%
Apollo Floating Rate (AFT) 7.14% -8.50% 8.28% -13.23% -4.02% 1.38% 1.14% -4.73%
TSL Credit Sr Loan (TSLF) 6.89% -9.82% 7.91% -12.71% -6.30% 3.77% 1.02% -2.89%
High Yield KKR Income Opportunities (KIO) 9.02% -5.24% 10.03% -9.28% -6.56% 5.80% 1.01% -4.04%
Barings Global Short Duration (BGH) 9.11% -5.79% 10.43% -9.45% -3.66% 7.83% 1.32% -3.66%
Pimco Dynamic Credit Income (PCI) 8.12% 2.62% 8.68% -0.18% -0.62% 8.55% 0.56% -2.80%
Credit Suisse Asset Management (CIK) 8.57% -9.22% 9.18% -11.18% -2.89% 6.14% 0.61% -1.96%
BlackRock Corporate High Yield (HYT) 8.15% -10.70% 8.77% -12.60% -2.15% 6.14% 0.62% -1.90%
New America High Income (HYB) 7.75% -12.26% 8.15% -13.28% 0.19% 7.14% 0.40% -1.02%
Barings Corporate Investors (MCI) 7.91% 0.73% 8.01% -2.03% 3.45% 4.33% 0.10% -2.76%
Multi-Asset Brookfield Real Assets (RA) 10.18% -3.58% 11.51% -10.06% -5.45% 9.88% 1.33% -6.48%
Clough Global Opportunities Fund (GLO) 10.92% -7.91% 11.08% -11.18% -15.26% 10.11% 0.16% -3.27%
Cohen & Steers CEF Opportunity (FOF) 7.91% -3.44% 8.67% -4.29% -5.00% 8.50% 0.76% -0.85%
Calamos Strategic Total Return (CSQ) 7.45% -0.52% 8.54% -1.19% -4.19% 9.44% 1.09% -0.67%
BlackRock Mulit-Sector Income (BIT) 8.07% -7.66% 8.62% -11.83% -2.36% 5.73% 0.55% -4.17%
Real Estate Nuveen Real Estate Income (JRS) 8.12% -7.85% 8.45% -7.18% 2.30% 14.60% 0.33% 0.67%
Cohen & Steers REIT & Preferred (RNP) 7.40% -9.04% 7.74% -10.81% 3.48% 8.69% 0.34% -1.77%
Utility/ Infrastructure Cohen & Steers Infrastructure (UTF) 7.83% -5.40% 8.15% -4.80% 3.60% 16.35% 0.32% 0.60%
Reaves Utility Income (UTG) 6.48% -4.89% 6.70% -1.87% 4.82% 3.43% 0.22% 3.02%
Preferreds JH Preferred Income III (HPS) 7.74% 1.07% 8.20% -0.34% 0.07% 11.69% 0.46% -1.41%
Convertibles Advent Claymore Convert & Inc (AVK) 8.98% -10.71% 10.25% -13.38% -7.47% 10.36% 1.27% -2.67%
Equity Sprott Focus Trust (FUND) 7.00% -9.98% 7.93% -10.82% -12.23% 12.63% 0.93% -0.84%
EV Tax-Managed Dividend Equity (ETY) 7.82% 0.70% 9.31% -2.60% -9.90% 7.38% 1.49% -3.30%
Average 8.08% -6.05% 8.88% -8.33% -3.36% 7.93% 0.79% -2.28%

Looking under the hood of the Widows & Orphans portfolio, we see a few items worth noting:

First, of course, is the value of diversification. There are quite a few outliers, both to the upside and the downside, in terms of both 6-month results and year-to-date 2019 results.

Outliers to the downside for 6 months in a number of cases turned out to be outliers to the upside for the past month, which was good in that the two performances offset each other to some extent and show movement in the right direction. Fortunately, there were some strong performers who made it through the past six months with positive results, which helped anchor the whole portfolio.

Examples of both were:

  • GLO, with its 15.26% 6-month drop, which would have been worse but for its 10.11% recovery so far this year (up even more in the last day or so as we go to press); lots of institutional interest in this fund, especially from RiverNorth, which is why I got interested originally. I like the strong distribution, but recently this has been the most volatile fund in our W&O portfolio and a candidate for being kicked out if it doesn't improve over the next six months or so;
  • FUND, with its 12.23% overall drop, but 12.63% rise year to date; good long-term record and experienced management, so I am inclined to give them some time to prove themselves
  • Similarly ETY, down 9.9% overall, but showing a strong January up 7.38% so far
  • A number of funds have strong records but are still pulling themselves back up from their lows during the past six months: ARDC, AIF, AFT, TSLF, KIO. All represent good value at current discounts and yield levels.
  • Some strong performers that pulled their weight through the downturn are worth mentioning: UTG, UTF, RNP, JRS, MCI, HYB.
  • The fact that I do NOT mention many other funds on the list is not intended as a negative and I regard the entire portfolio, well diversified as it is, as attractive at current prices, distribution and discount levels.

In summary, our Widows & Orphans' portfolio is continuing to crank out cash, as it is supposed to, and while we try not to fixate on the market price of the factory and the machines in it, the trend so far this year has been positive on that front as well. In our Income Factory™ "classic" portfolio (i.e. aka our "Savvy Senior" portfolio), our January returns have already offset and eclipsed 2018's paper losses. The W&O portfolio may be more like the tortoise, and take a bit longer to overcome last year's losses, but our Widows & Orphans won't go hungry in the meantime, with cash coming in at an 8.88% rate.

Thanks to all my readers and followers for your ongoing support, and to my fellow Seeking Alpha contributors for providing me with so much valuable analysis and other investment ideas.

Disclosure: I am/we are long ARDC, BGX, KIO, BGH, HYB, HYT, MCI, RA, GLO, FOF, JRS, RNP, UTF, UTG, AVK. 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: All the funds listed are either (1) held by me in one of my portfolios, (2) held in a portfolio I manage for family and friends, or (3) on our "approved list" of funds that I have identified as attractive buys in days, weeks or months ahead.