Portfolio Rotation - The Income Method Series

Includes: MIE, OXLC, TPVG
by: Rida Morwa

Investors like the Gambler, need to know when to hold and when to fold.

Portfolio Rotation like spring cleaning is often neglected.

Portfolio Rotation is a method to help your portfolio reach its goals.

Co-produced with Trapping Value and Beyond Saving for High Dividend Opportunities

Recently, we’ve taken time to highlight various aspects of our investment philosophy. We've covered how we determined our target portfolio yield, how we use a unique method of pairing lower risk and high yield securities together to create a truly diverse and strong portfolio. A portfolio that like a castle with a wide moat can withstand the test of time as well as the fiercest of storms.

Today we want to discuss something that many may feel is mundane, yet when it is practiced often creates extremely strong responses - Portfolio Rotation. Portfolio rotation is the strategy by which portfolio managers - which you are if you actively control your investments! - rotate securities in and out of their portfolios to achieve gains or meet their desired outcomes.



Why does it elicit such strong emotions? People hate selling winners even more than they hate selling losers. Portfolio rotation requires that both happen at various times. It is human nature to get attached to your winners and to be stubbornly prideful when forced to capitulate on a losing position. We get it. We're not perfect as many of you know and we've had to do both, but it is essential to practice portfolio rotation to achieve the maximum immediate income from your portfolio.

Portfolio Rotation is A Common Practice Many Miss

Portfolio rotation is a frequent occurrence but flies under the radar of most investors. When your favorite ETF rebalances monthly to match its index, it is a type of rotation. How about that CEF you love, have you ever looked at its "portfolio turnover" percentage? That’s the amount of buying and selling they've done, the higher percentage the more aggressive the rotation.


Source: OXLC Annual Report

Oxford Lane Capital (OXLC) which currently yields 15% has seen routinely 50% of its portfolio rotated annually. They are frequently adjusting their CLO holdings to best benefit shareholders.

Cohen & Steers MLP Income and Energy Opportunity Fund, Inc. (MIE), which yields 9.2%, also has an equally high level of portfolio rotation.


Source: MIE Annual Report

These ratios are again annual figures going back 5 years for both funds. While we historically at High Dividend Opportunities do not track our percentage of portfolio rotation. We recently have seen a higher turnover rate, closing positions we have held for two years or longer and moving into new opportunities. The reason you feel it as an investor, versus holding a fund that does it for you, is because you're forced to click that sell button and see the inflow of cash as you close your positions.

Portfolio Rotation Means Breaking Up With Your Long Time Loves

This is the hardest aspect of applying rotation to your portfolio. As investors, we want to hold our investments forever. "Buy and hold!" is the battle cry, but reality is that most investments do not warrant a lifelong commitment. We aim to invest in a security for at least 2 years, but are quick to adjust if our reason for investing is fulfilled earlier or the thesis breaks.



Holding a winner, whose potential value is fulfilled and steady dividends you enjoy is completely acceptable - especially if you achieve the income stream you need or desire. On the other hand, if you are looking for more income to live on, rotating to a new opportunity makes more sense. Consider this, recently we at High Dividend Opportunities sold out of Triple Point Venture Growth (TPVG) and rotated into a new opportunity. TPVG had returned over 25% in our yearlong holding of it.

Why should you rotate out a security?

  1. The thesis has broken negatively

  2. The potential upside has been exhausted and another equal or less yielding security has more potential

  3. Selling at this level will provide addition income from an equally as safe option.

  4. A move to an equally yielding but more recession resistant security is available.

Consider your portfolio. Do you have securities that in a recession are bound to cut their dividends or potentially stop paying all together? We have been writing about and adjusting our portfolio to increase its recession resistance this has caused a higher rate of portfolio rotation than normal. We've heard the pain from our members as they broke up with winners to move onto new opportunities. The future of those opportunities is bright!

Portfolio Rotation Leave Room for Success

If you feel a new security has a proper home in your portfolio. Look your portfolio over. It might be time to clean out the cobwebs and pick give a home to a new security by rotating out an old one.

When securities remain stagnate in a portfolio and are not re-evaluated at their current values, a portfolio will trend towards mirroring its index. Take TPVG for example. $10,000 investing in it would've turned into $12,500. Now we have reinvested it into a new opportunity yielding above 10% when we rotated into it. TPVG was yielding 10% when we invested in it initially. Our annual income now sees a 25% boost from a simple rotation, while leaving room for our new investment to grow in value. We're not eschewing a rotation back to TPVG in the future, but it was time for a change.

We have deliberately avoided mentioning taxes in conjunction with portfolio rotation until this point as that is a highly individual issue. Further, most of our investors use tax-deferred accounts or are international, complicating any application of this on a service level. From our perspective we make changes on a portfolio level but we cannot incorporate tax considerations into it. If we did do that, in addition to the reasons mentioned above, the further a security rose and moved away from fair value, the less likely we would be to sell it based on taxes.

Key Takeaways

Investors are hoarders due to human nature. We love our winners. We hate to sell them. We resist admitting defeat on our losers. We hate to sell them.



Rotation is that process by which we achieve catharsis by keeping life in our portfolio. This is similar to pruning a tree to help it continue to achieve healthy growth and provide an abundance of fruit. In this case, the fruit is income in the form of dividends. Don't neglect your tree. Don't let your hesitation stop it from bearing a bumper crop of fruit for your life.

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Disclosure: I am/we are long MIE, OXLC. 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.