My Cupolone Income Portfolio: Living With Price Swings
Summary
- The golden rule for any long-term investor: Know how to wait!
- February’s significant decline in the overall stock market also impacted CEFs.
- The recent sell-off reduced premiums and spread discounts for the CEFs I identified for my new Cupolone Income Portfolio. The time has come to take action.
- My declared goal is a 9% income. I’m not so far from that today by having made the right purchases at the right moments.
Time, Discipline, and Patience
“The stock market is a no-called-strike game. You don’t have to swing at everything—you can wait for your pitch.” (Warren Buffett)
At the end of my January article, “My 10% Cupolone Income Portfolio—A New Year’s Resolution for 2020,” I wrote that given the current economic climate, the overall yield of my proposed Cupolone Income Portfolio would likely be far below the 10% income I experienced when I built my initial high-yielding portfolio (“Building A 10% Income Portfolio”).
The CEFs I identified are:
- BlackRock Health Sciences Trust (BME)
- Eaton Vance Tax-Adv. Global Dividend Opps (ETO)
- Eaton Vance Tax-Adv. Dividend Income (EVT)
- John Hancock Tax-Adv. Dividend Income (HTD)
- Pimco Corporate & Income Strategy (PCN)
- John Hancock Premium Dividend (PDT)
- Pimco Income Opportunity (PKO)
- Cohen & Steers REIT & Preferred Income (RNP)
- Cohen & Steers Quality Income Realty (RQI)
- Cohen & Steers Infrastructure (UTF)
- Reaves Utility Income Trust (UTG)
The CEFs already in my portfolio were:
- DoubleLine Income Solutions (DSL)
- Guggenheim Credit Allocation (GGM)
- NexPoint Strategic Opportunities (NHF)
- Pimco Dynamic Income (PDI)
- Pimco Corporate & Income Opportunities (PTY)
My goal (and challenge) today is to build a new portfolio that yields at least 9% income. So, the potential of a lower yield was a good reason to wait for better times before investing.
That time has come.
The Biggest Weekly Plunge Since 2008
With the S&P 500 down for many days straight in the last two weeks of February, the CEF market followed the flow. Of course, nobody knows what the long-term impact of the coronavirus will be for the world economies, but so far it has created an earthquake in the financial markets. Can that impact be reabsorbed soon or not? Who knows?
Personally, I have long believed that the long bull run for the stock market could soon be reaching an end. Based on this belief, I cleared my position in ECC and GOF, and reduced my position in NHF last summer. In the autumn I sold the two ETNs I owned, CEFL and SMHD. Some days after publishing my February article I also decided to close my position in NHF (with a loss) and DSL, and make a substantial reduction to my positions in PDI and PTY (taking advantage of the fact that I was up with DSL, PDI and PTY).
I’m not used to trading stocks; I don’t feel comfortable when I’m strolling around waiting for something to happen. In my opinion the situation was ready for the anticipated correction. I decided not to trust Mr. Market’s flatteries; I sold and waited to see what came next.
In the following charts you’ll see what happened on Friday, February 28. While I was examining the recent sell-off on the funds composing my portfolio, I noticed some interesting things. The first and most obvious was the huge volume of trades on that day. The first chart shows the volume of trades for the day when the markets closed. I’ve highlighted DSL, PTY and RQI. Note: The 22.00 hour in the last column is the closing time for the Italian market.
(Source: FinecoBank, Italy)
Compare the trade volumes for the three CEFs highlighted in the previous chart with the three-month and the seven-day average volumes for those CEFs in the following charts:
(Source: Seeking Alpha)
(Source: Seeking Alpha)
(Source: Seeking Alpha)
Millions of shares were traded in this single day, against a much lower three-month average. At first glance, this would seem to be a typical panic sell-off. But, let’s examine the evolution of these sales during the day.
(Source: Morningstar)
(Source: Morningstar)
The –4.48% for PTY tells us of a shrinking premium on NAV.
(Source: Morningstar)
So what does this mean, at least for these three CEFs? Is this panic selling or a normal short-selling, with subsequent re-building of positions? Granted, prices were going down, that’s undeniable, but I have the impression that Mr. Market was waiting for a chance to rebalance many excesses accumulated over time. The previous charts—although circumscribed to just three CEFs and only to February 28—seem to attest that bearish investors are back, after a long fast.
The silver lining to the drastic market declines is that they offered me the opportunity to increase the number of funds in my portfolio while buying them at lower prices. I’ve also been able to re-build my positions in DSL, PDI and PTY. (I did not repurchase NHF.) As Warren Buffet said, “Look at stock market fluctuations as your friend rather than your enemy—profit from folly rather than participate in it.”
Premiums Vanished or Mitigated
As I wrote in a previous article, many of the CEFs I identified as candidates for my new Cupolone Income Portfolio quoted at a premium, in some cases at large premiums. PCN, for example, showed a +30% premium, PKO a premium close to +15%. Many others, like PDT, quoted at more than +10%.
Let’s see today’s discount/premium relationship for all of the 15 CEFs I’ve discussed, all of which are now in my Cupolone Income Portfolio, even if only to a small extent.
(Source: Morningstar)
As you can see, PCN still shows a +10.74% premium: that’s large, but not jumbo. Both PKO, at +4.48%, and PDT, at –0.33%, are approaching the discount field. The other Pimco funds (PDI and PTY), which are very rarely seen at discount, still quote at premium. The Cohen & Steers funds (RNP, RQI, and UTF) and the Reaves fund (UTG) sell at deep discounts.
Things Are Shaping Up
Based on RiskGrades, I’ve begun to shape my new Cupolone Portfolio as shown in the following table.
(Source: Morningstar, RiskMetrics, Author)
I maintained my previous position in GGM, which is why it currently occupies 25.99% of my portfolio. Its 9.63% yield at my load price (a major $22.58!) with no ROC ever recorded leads me to feel confident in GGM and so maintain my entire position, with no capital loss.
Bottom Line
“We simply attempt to be fearful when others are greedy and to be greedy when others are fearful.” (Warren Buffett)
Is it time for a “panic” purchase? In my mind, yes; I’ve already taken the first steps. The small portfolio I built during the last week of February will yield an income of 8.45%, which is not so far from the 9% I targeted in the premise for my Cupolone Income Portfolio. I continue to monitor the situation and stand ready to take action.
P.S. Of course, the promised analysis of the Equity Sectors Side (BME, PDT, RQI, UTF and UTG) and the Stock Allocation Side (ETO, EVT, HTD and RNP) of my New Cupolone Income portfolio will be postponed to a future article…
This article was written by
Analyst’s Disclosure: I am/we are long BME, DSL, ETO, EVT, GGM, HTD, PCN, PDI, PDT, PKO, PTY, RNP, RQI, UTF, UTG. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (32)
One question the higher risk score the better? How exactly does it get calculated?
Jason
Here you can understand how RiskGrades work:www-qc.nasdaq.com/...
As you pointed out, patience is key. To quote Michael Valentine Smith: "Waiting Is".Happy Trails...
What you are perhaps overlooking is that while there may have been concerns as to the sustainability of the distributions of these particular funds prior to the current market meltdown, now it's the profits, distributions and dividends of the whole market that's causing concerns about sustainability, hence the sell off.
So besides the softening in the price of ECC and GOF prior to the market correction in anticipation of a possible cut now they have dropped significantly along with the rest of the market in fear of future cuts while offering both a higher return and lower price to compensate for any negative future event.
The difference is that an equal combination of say GOF ECC and OXLC is yielding 16.5% almost double your choices allowing the same income stream with only half the capital deployed leaving ample funds to deploy during any future weakness in these or any other fund one might choose. One can still hold those existing positions paying far lower dividends but a sell off offers the opportunity to buy the higher yielders at depressed prices offering a good margin of safety. The risks are no more currently in my opinion than any other fund with a lower yield. They are all being priced now for a possible future event that may or may not materialize.
GOF is a different story, and I keep following it.
Anyway, I respect your opinions.
