- The heading refers to the number of times I had holes made in my Baby Bonds/PFDs ladder due to Calls and the trades I had to do to fix it.
- The biggest "trades" during the quarter were the ones I failed to pull the trigger on. These “mistakes” are covered.
- I have decided to change which account to do my conversion trades with. The logic for that will be explained.
- A short review of my various account allocations and performance will close this article.
The warning shot was made in late 2020 when Capital Southwest Corporation (CSWC) called part of their 2022 5.95% PFD. They completed the Call in 2021 and it was followed by four other BDCs also doing Full Calls. These involuntary trades caused me to buy other Notes/Pfds to fix the holes in the eight-year Fixed Income ladder I constructed.
There were few equity trades for the quarter as the market recovery last year had my equity ratio in my desired range, so I thought. Three trades were first-time buys: JEPI, NMCO, and WAMVX. A majority of my trading activity was writing Put options and those trades are covered in a separate article.
Conversion strategy change
For the past two years, I converted a total of $80,000 in my 401k into its Roth option. About 40% resulted in taxable income. I was too focused on that fact, until now. My wife reaches her RMD age three years before me so it makes more sense to convert her IRA to her Roth first. Since those conversions will be 100% taxable, the amount will be less but effect on future RMDs is the same. Another benefit of the change is my wife pays a lower state tax rate than I do.
Trades NOT made
When I completed my 2020 year-end equity review, I realized my sell-off last spring of my 401k Small-Cap position was never reversed. Except for a small Micro-Cap and two risk-averse ETF buys, it still isn't. Like last year, my focus on option trading and the time-consuming search to get a COVID19 vaccination appointment kept our equity allocation off my radar. Recent research shows Small-Cap stocks still undervalued compared to Large- and Mid-Cap ones and I finally pulled the trigger and added to my IJT position and the Mid- and Small-Cap funds in my 401k in April.
Others were placed but my bids to buy bonds and preferreds below Par were too aggressive and were not executed, even the few that I moved up the Bid on. All the Call dates are either in the past or near future so I didn't want to buy and immediately get Called. I'm working on my ability to calculate the "clean" or "stripped" price so I can place better bids.
All trades were executed in our Fidelity accounts. No trades were done in our taxable Morgan Stanley account. The only activity in my 401k was a $5000 conversion into the Roth option before I decided to change strategy.
Trades made for me
Capital Southwest Corp., 5.95% Notes due 12/15/2022 (CSWCL) Originally purchased on 7/9/2020 at $24.75, CSWC completed their three-part Call of this issue in January. My ROI was 7.8%. Unlike some of the other issuers, I do not believe CSWC issued new debt to replace it.
Prospect Capital Corp., 6.25% Notes due 6/15/2024 (PBB) I held this in two accounts, both bought in late 2018, with one resulting in a 6.46% ROI and the other a 7.62% ROI when it was called in February. Prospect has two other Notes out but I am okay with those maturity dates at this time.
New Mountain Finance Corp., 5.75% Notes due 10/1/2023 (NMFCL) One of my longer held Notes, this one I bought in early 2019 at $24.89. The full issue was called in March, resulting in a ROI of 6%.
B. Riley Financial, 7.50% Senior Notes Due 5/31/2027 (RILYZ) was called as the quarter closed. This is one of two issued by this firm at I owned, the other being the RILYM, which recently became callable. This is one of the many I purchased last summer before fear left the market as the price was $23.85. This resulted in a 14.6% ROI.
TriplePoint Venture Growth BDC Corp., 5.75% Notes due 7/15/2022 (TPVY) completed its call on April 5th. One of my more recent buys (Oct'20), ownership was very short. Purchased at $24.97, the ROI was 6%. TriplePoint has now called all their Notes.
ROI note: My YTC/YTM calculator isn't the most precise as it estimates the payments received based on purchase and sell dates. The shorter the time owned, like TPVY, the more imprecise the value generated will be.
Trades I initiated
I will list the trades related to my Fixed Income Ladder first, then the few other trades I made during the quarter.
Nuveen Emerging Markets Debt 2022 Target Term Fund (JEMD) This was and still is one of the largest holdings on my Ladder; currently at 2500 shares. Three times I sold shares, a total of 1000, at an average price of $7.88. In my last review of JEMD, my best estimate was it would return $8.00 at termination, so I decided to reduce my exposure as it approached that value and the discount shrunk.
Oxford Lane Capital Corp. 6.75% PF TRM 24 (OXLCM) Twice I bought 100 shares between $24.95 and $24.98 to rebuild my 2024 step which was reduced when PBB was called. Since OXLCM was past its Call date, I stopped buying once it rose above $25.
Oxford Lane Capital 6.25% Preferred Shares Series 2027 (OXLCP) I reviewed OXLCP late last year but I had enough 2027 debt at the time. With RILYZ being called, it opened space for this which I purchased 100 shares at $24.31 late in March.
I made one non-ladder fixed income and three equity trades this quarter.
Nuveen Municipal Credit Opportunities Fund (NMCO) I discovered and reviewed NMCO in January as a possible discount-shrinkage play. After the publication waiting period, I bought 1000 shares at $13.80 for our Joint taxable account. So far, the play has worked as the discount went from 6.08% to 3.87%, with a recent price of $14.15.
Amplify ETF Trust - Amplify BlackSwan Growth & Treasury Core ETF (SWAN) SWAN has been covered numerous times on Seeking Alpha. As with many ETFs trying to deliver equity-like returns with minimized risk, it has its flaws but performed very well last spring. I added 250 shares to my wife's inherited IRA to conservatively raise its equity exposure. As of now, it is off slightly from the mid-January purchase at $32.63.
Wasatch Micro Cap Value Fund No Load (WAMVX) While this MF wasn't covered on Seeking Alpha, its sister fund, WMICX was last December. Having little exposure to Micro-Cap stocks, I added 2278 shares ($4.39) to my wife's Roth account as it is one of our accounts we want with a high equity ratio. We missed the big runup in early January but we were still up about 8% at the end of the quarter.
JPMorgan Equity Premium Income ETF (JEPI) Several of us reviewed JEPI in February, with me being the most Bearish, at least for investors wanting S&P 500 returns. JEPI, I said was for income first, equity returns second, which explains why I bought 50 shares for my HSA account as its first equity exposure. The price is up about 4% since its purchase ($56.09).
The accounts with the best performance had the highest Equity ratios and also more weighted to Mid- and Small-Cap stocks within that allocation. Overall, my weighted ROI was 71bps better than my custom benchmark.
I mentioned one strategy change I made this quarter, that being from where we are doing RMD-avoiding conversions into our Roth accounts. The second was merging my taxable account into our Joint taxable account. Our income change has us filing differently for our state taxes. The other need for the account, contributing to my Charitable Trust Fund stopped as we feel it's fully funded for now. That change allows us to claim the expanded Standard Deduction instead of itemizing.
The strong rally, despite UST rates climbing, in baby bonds and term-preferreds, has me willing to enter bids above Par if the Call date hasn't passed and the YTC is still attractive. I have several bids in now under that trade concept. My focus is bonds/preferreds maturing in either 2024 or 2026.
2nd Quarter focus
I still like my Fixed Income ladder as one tactic to avoid harm when interest rates go up. I covered the concept in my Building a Ladder article and recently did an update on the assets used in my ladder. Most of the trades listed here were done after its publication.
I want to get my equity ratio over 40%. Along with expanding existing equity exposures, I will attempt to add some via writing ATM Put options. These trades will be mostly done in the Joint account where the cash held is too high.
I will continue my Put writing strategy with the goal of a 6-8% ROI on the cash backing that trade strategy. Low volatility is making it tougher without taking enhanced risk. For how that faired in the first quarter, read my 1st Quarter Option Trade Results article.
Knowing our financial situation and risk tolerance is critical in understanding the why behind the trade strategy we use and our targeted asset allocation. The following statements are designed to give color about us.
- We are both on Medicare and by year-end, both will be drawing on our Social Security accounts.
- Along with my non-COLA pension, those income sources should meet our normal annual expenses.
- While working, we funded IRAs, Roth IRAs, and my work 401k. When the RMDs start in a few years, that should guarantee we will not need touch our ROTH IRAs to meet living expenses.
- As we approached retirement, our detailed retirement planning indicated we didn't need to take on excessive market risk and thus we invest conservatively.
This article was written by
Retired Investor has been investing since the 1980s and has a background in data analysis and pension fund management. He writes articles to help others prepare for retirement by investing in CEFs, ETFs, BDCs, and REITs. He is a long only investor and shares strategies for trading options with a focus on cash-secured-puts.He is a contributing author to the investing group Hoya Capital Income Builder. Hoya specializes in the portfolio management of publicly traded real estate securities and dividend ETFs. Learn more.
Analyst’s Disclosure: I am/we are long WAMVX, SWAN, OXLCM, OXLCP, JEMD, NMCO. 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.