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Actual Portfolio Management - 20 Plus Years To Retirement - 06/30/15 Update

|Includes: AHGP, AMT, ASGN Incorporated (ASGN), CG, EEQ, ENB, JNJ, KMI, MOAT, NSH, PCEF, RSP, SO, T, VER, VZ, WOOF

As an avid reader of Seeking Alpha articles, I don't see a lot of articles about running an actual portfolio. By running an actual portfolio I mean: a) portfolio policies and rules, b) investment allocations and rationale, and c) long-term portfolio performance including discussion. By publishing semiannually, I hope to at least somewhat fill that gap.

Existing readers will note significant changes previous editions. I have reorganized and improved the format so the "meat" of the issue can be found in the first few pages.

Model Portfolio: 20 Plus Years to Retirement - Nontax Managed

Please note the name change. It is long-term in nature and it is not managed to minimize the impact of taxes. The portfolio was started on January 1, 2014.

The Score Board - Portfolio Returns vs Benchmark

The Score Board: 20 Plus Years to Retirement - Nontax Managed

Year

Portfolio

Morningstar Total Stock Market Index

Gross Difference

2015 (YTD)

-2.81%

0.88%

-3.69%

2014

12.81%

10.71%

2.10%

Since Purchase*

8.02%

7.95%

0.07%

* Annualized returns. Because of the nature of the way annualized returns are calculated, summing the years will lead to different results from the since purchase line.

Performance and Commentary

The underperformance from the last six months has continued. The portfolio is still ahead of its benchmark by a very slim margin on a cumulative basis. Several factors were responsible for the difference in performance:

a) The market has favored growth over value. The portfolio has a large value tilt which should help in the long run but is really hurting current performance. I am a value investor so the underperformance is something that I will simply have live with until the market changes.

b) The portfolio is heavily invested in sectors (energy, utilities, and communication services - in that order) that are under performing compared to other sectors.

c) The portfolio is under invested in sectors (technology, consumer cyclical and basic materials - in that order) that have had good performance this reporting period.

d) Southern Company, SO. The issues of cost overruns at its nuclear and coal gasification plants plus the specter of rising interest rates have generated an underperformance of 13.39 versus the benchmark. SO is a fine company and one with which I am comfortable sticking with.

e) Enbridge Energy Management, EEQ. The underperformance has to with the fact that the stock got ahead of itself. EEQ is a fine investment to own and collect the stock dividend which effectively turns income into capital gains if held beyond one year.

f) American Reality Capital Properties, ARCP. Still in recovery mode from last year's accounting and management debacles.

The performance of each investment for 2015 and since purchase is below.

Investment

2015 Performance

Total Return

2015 Performance

vs Benchmark

Cumulative Total Return Since Purchase

On Assignment (NASDAQ:ASGN)

18.35%

17.47%

14.71%

NuStar GP Holdings LLC (NYSE:NSH)

13.74%

12.86%

-6.16%

AT&T (NYSE:T)

8.54%

7.66%

6.28%

The Carlyle Group LP

8.11%

7.23%

8.11%

VCA Antech (NASDAQ:WOOF)

7.60%

7.22%

69.93%

Johnson & Johnson (NYSE:JNJ)

7.49%

6.61%

9.47%

Verizon (NYSE:VZ)

1.99%

1.11%

2.92%

PowerShares CEF Income Composite Portfolio (NYSEARCA:PCEF)

0.96%

0.08%

2.95%

Guggenheim S&P 500 Equal Weight ETF (NYSEARCA:RSP)

0.49%

-0.39%

15.44%

Market Vectors Wide Moat ETF (NYSEARCA:MOAT)

-1.29%

-2.17%

13.11%

American Tower (NYSE:AMT)

-4.82%

-5.70%

15.30%

Kinder Morgan Inc. (NYSE:KMI)

-7.07%

-7.95%

15.27%

Spectra Energy (NYSE:SE)

-8.15%

-9.03%

-1.14%

American Realty Capital Properties (ARCP)

-10.17%

-11.05%

-21.64%

Alliance Holdings General Partners (NASDAQ:AHGP)

-10.83%

-13.08%

4.15%

Enbridge Energy Management LLC (NYSE:EEQ)

-12.29%

-13.17%

19.79%

Southern Company (NYSE:SO)

-12.51%

-13.39%

7.65%

Benchmark Note:

The best benchmark would be the Vanguard Total Stock Market ETF (NYSEARCA:VTI). Since Morningstar is used to track the portfolio and VTI is not one of the options Morningstar offers to as a comparison, the benchmark will be the Morningstar US Market Index (MUSMI). MUSMI is very similar to VTI so it makes for a good substitute.

In closing, the first 18 months are now in the books. A good or poor six months does not make a trend. The next review point will be December 31, 2015. If the outperformance continues over three to five years, then there is enough of a track record to state that I have some skill in stock picking and portfolio allocation. Until that time, my outperformance may be attributable to pure luck.

Open Positions

The current investment summary:

Model Portfolio Open Positions Summary: 20 Plus Years to Retirement - Nontax Managed

Core/

Overlay

Super Sector

Investment Name and Symbol

Target

Allocation

Core

Cyclical

American Tower

7.50%

Core

Cyclical

The Carlyle Group LP

7.50%

Core

Defensive

Johnson & Johnson

7.50%

Core

Defensive

Southern Company

7.50%

Core

Sensitive

Kinder Morgan Inc.

7.50%

Core

Sensitive

Verizon and AT&T /1

7.50%

Subtotal - Core Investments

45.00%

Overlay

Not Applicable

Market Vectors Wide Moat ETF

5.00%

Overlay

Not Applicable

Guggenheim S&P 500 Equal Weight ETF

5.00%

Overlay

Not Applicable

PowerShares CEF Income Composite Portfolio

5.00%

Overlay

Sensitive

Enbridge Energy Management LLC

10.00%

Overlay

Sensitive

NuStar GP Holdings LLC

7.50%

Overlay

Sensitive

Spectra Energy

7.50%

Overlay

Sensitive

On Assignment

5.00%

Overlay

Cyclical

American Realty Capital Properties

7.50%

Subtotal - Overlay Investments

52.50%

Total Invested

97.50%

/1. Must buy in pairs. Allocate 3.75% to each investment.

 

The current investment detail is below. The table is sorted by date from earliest to latest.

Model Portfolio Open Positions Detail: 20 Plus Years to Retirement - Nontax Managed

Date Added

Investment Name, (Symbol) and Other Data

Rationale/Comment

01/10/14

American Tower

Target Allocation: 7.5%

Core/Overlay: Core

Super Sector: Cyclical

Sector: Real Estate

Current Rating: Buy < $97

06/30/15

Dividend yield looks measly but has grown dramatically since converted to a REIT. Growing like a weed. A strong buy for growth and income.

12/31/14

Unchanged from 06/30/14.

06/30/14

AMT is the tower provider Verizon, AT&T and others and has ongoing growth outside the USA. This is a REIT but the primary reason is growth.

01/10/14

Market Vectors Wide Moat ETF

Target Allocation: 5.0%

Core/Overlay: Overlay

Super Sector: N/A - Varies

Sector: N/A - Varies

Current Rating: Buy < $30

06/30/15

Unchanged from 12/31/14.

12/31/14

Target allocation trimmed to 5%. Otherwise, unchanged from 06/30/14.

06/30/14

MOAT is a best ideas fund. MOAT is a convenient way to copy a strategy that would result in a lot of trading. If buying for a taxable account, consider replacing MOAT with ELEMENTS Linked to the Morningstar Wide Moat Focus Total Return Index (NYSEARCA:WMW) unless you don't feel comfortable with the credit risk than an ETN brings.

01/17/14

Spectra Energy

Target Allocation: 7.5%

Core/Overlay: Overlay

Super Sector: Sensitive

Sector: Energy

Current Rating: Buy < $39

06/30/15

Moved to overlay bucket on 03/30/15 in a swap with Verizon and AT&T. May add to position if price continues to drop.

12/31/14

Unchanged from 06/30/14.

06/30/14

SE is the general partner of Spectra Energy Partners (NYSE:SEP). As the limited partnerships grow, the general partner grows with it but at a faster rate. The current inflation worries have impacted midstream partnership prices but the partnerships are ruled by the Federal Energy Regulatory Commission which allows much higher return than state utilities. SE has wide sustainable competitive advantages and is effectively on sale now. Buy and sleep well at night.

01/17/14

Kinder Morgan Inc.

Target Allocation: 7.5%

Core/Overlay: Core

Super Sector: Sensitive

Sector: Energy

Current Rating: Buy < $40

06/30/15

Performing better than peer in tanking energy sector. Dividend growth will be strong.

12/31/14

KMI has withstood better the freefall in energy sector stock prices. Now that all the limited partnerships have been merged, dividend growth is likely to resume in earnest.

06/30/14

KMI is the general partner for Kinder Morgan Limited Partnerships and El Paso Limited Partners (KMP and KMR, EPB). As the limited partnerships grow, the general partner grows with it but at a faster rate. The current inflation worries have impacted midstream partnership prices but the partnerships are ruled by the Federal Energy Regulatory Commission which allows much higher return than state utilities. KMI has wide sustainable competitive advantages and is effectively on sale due to short seller attacks. Buy and sleep well at night.

02/03/14

Johnson & Johnson

Target Allocation: 7.50%

Core/Overlay: Core

Super Sector: Defensive

Sector: Healthcare

Current Rating: Buy < $91

06/30/15

With selling of VCA Antech , increasing allocation from 5.0% to 7.50%.

12/31/14

Unchanged from 06/30/14.

06/30/14

The stock market swoon is providing an unexpected opportunity to buy quality stocks at a discount. JNJ is a name you've heard of unless you have lived on Mars. JNJ is one stop investment across all parts of the medical sector. JNJ is a relative value play but one to hold for a long time.

02/03/14

Southern Company

Target Allocation: 7.5%

Core/Overlay: Core

Super Sector: Defensive

Sector: Utilities

Current Rating: Buy < $45

06/30/15

Cost overruns on Mississippi and Georgia projects and future higher interest rates creating a drag on stock price. Expect both issues to fix themselves with time. Strong buy below limit.

12/31/14

Same as 06/30/14. Industrial growth is another plus.

06/30/14

The stock market swoon is providing an unexpected opportunity to buy quality stocks at a discount. Not fully on sale but still a good buy is Southern . SO is the best run electric utility and is partially on sale due to two factors: a) the construction cost overruns at its coal gasification facility and b) the misconception that utilities like SO are poor performers when interest rates rise. In reality, it is company performance and relations with regulators that matter.

02/26/14

Guggenheim S&P 500 Equal Weight ETF

Target Allocation: 5.0%

Core/Overlay: Overlay

Super Sector: N/A - Many

Sector: N/A - Many

Current Rating: Buy < $77

06/30/15

Slightly trailing the benchmark this year. Not an unexpected event when growth stocks lead the market.

12/31/14

Target allocation trimmed to 5%. Otherwise, unchanged from 06/30/14.

06/30/14

RSP is a best ideas ETF that has trounced the S&P 500. RSP was inserted due to limitations on buying the CAPE ETN (NYSEARCA:CAPE). CAPE is a best ideas exchange traded product based on the ideas of Robert Shiller. The Cyclically Adjusted Price-Earnings Ratio measures P-E values over a ten year horizon. The CAPE ratio will not tell you what the stock market is doing next year but rather what securities and sectors are historically cheap. The CAPE ETN is a way to capture this in one bucket. This is a value tilt investment for the long run and is an overlay holding. If your broker does not allow the purchase of CAPE, buy Guggenheim S&P 500 Equal Weight ETF instead. Once CAPE becomes available, I plan on replacing RSP with CAPE.

02/26/14

PowerShares CEF Income Composite Portfolio

Target Allocation: 5.0%

Core/Overlay: Overlay

Super Sector: N/A - Varies

Sector: N/A - Varies

Current Rating: Buy < $20

06/30/15

Unchanged from 12/31/14.

12/31/14

The recommendation to use the YieldShares High Income ETF (NYSEARCA:YYY) as it looks like the provider has done a poor job of preventing front running of upcoming changes by market participants. Now use PCEF instead of YYY. If you own YYY, I would hold but would not add money. If you were planning to add money to YYY, buy PCEF instead.

06/30/14

PCEF is a replacement, due to broker limitations, for the original choice of purchasing the YieldShares High Income ETF . YYY is another best ideas fund that is actually a closed end fund (NYSEARCA:CEF) not an ETF. It is a newer (started in June 2013) than PCEF which debuted in February 2010 and is obviously smaller. YYY tracks the YYY tracks the ISE High Income Index comprised of 30 closed-end funds chosen for their combination of yield, discount to net asset value and liquidity. No holding can exceed 4.25% at the time the portfolio is constituted or when the annual rebalance is done. The index has a 59% weighting in equity CEFs, 26% in debt CEFs and 15% in asset allocation CEFs which include CEFs that don't fit into the equity or bond categories. Like PCEF, this a fund of fund concept that assumes that when professional investors go against individual investors, the professional investors will win. Since most CEFs are held by individual investors, I look at this as reasonable assumption. PCEF has a higher expense ratio, should provide less income than YYY and there is no duration data available (YYY has a duration score of less than two years). If your broker does not allow you to buy YYY, buy PCEF instead. Once the broker allows YYY to be bought, sell PCEF and buy YYY.

04/07/14

Verizon and AT&T

Target Allocation: 3.75% each

Core/Overlay: Core

Super Sector: Sensitive

Sector: Communication Services

Current Rating : Buy < $49

Current Rating : Buy < $37

Note: Buy in pairs.

06/30/15

Moved to core bucket on 03/30/15. Likely to have these picks for a very long time.

12/31/14

VZ and T have been caught in investor myopia because of the market actions of Sprint and T-Mobile. Ignore the market action and add to positions. VZ is a growth and income stock. T is more of an income stock than growth.

06/30/14

VZ and T need no introduction. They are the biggest and are effectively the duopoly of the controlling mobile communications in the US and large parts of the world. In spite of all the hype about a consumer price war from Sprint and T-Mobile, both are small fry in the US market and even if they combined, it is questionable if they could challenge VZ and T. VZ and T spend more in one quarter on network improvements then they spend in a year. Sprint and T-Mobile are also making a splash to gain customers but killing their margins in the process. Sprint also has a heavy debt load. T's solid foray entry into the prepaid market through its purchase of Leap Wireless will only put further pressure on Sprint and T-Mobile down the road. Buy these in pairs. The unusual percentage sums to same allocation as American Tower giving the portfolio a 15% allocation to the communications industry that has utility like defensive qualities.

05/16/14

On Assignment

Target Allocation: 5%

Core/Overlay: Overlay

Super Sector: Sensitive

Sector: Industrials

Current Rating: Buy < $35

06/30/15

Top performer so far this year. Thesis beginning to play out. When market reaches overbought territory, it will be a sale candidate.

12/31/14

Trends have not developed as fast as I hoped. Sticking with it for now.

06/30/14

ASGN provides short and long term staffing solutions, including direct hire, to firms in the health care, life sciences, and IT fields. ASGN specializes in the highly skilled personnel with multiple years of experience. The eventual implementation of the Affordable Care Act, aka Obama care, is one factor in limiting the flexibility of employers to right size their firms. With the improvement in the economy, employers cannot continue to stretch their employees much further because of overtime costs and employee burnout. They will either have to hire or add temporary staff. ASGN will benefit from both of these trends.

05/16/14

Enbridge Energy Management LLC

Target Allocation: 10%

Core/Overlay: Overlay

Super Sector: Sensitive

Sector: Energy

Current Rating: Buy < $37

06/30/15

Unchanged from 12/31/14.

12/31/14

With Kinder Morgan Management (NYSE:KMR) being merged to Kinder Morgan , EEZ is the last institutional share on the market. EEQ is still in turnaround phase. Buy when below limit price.

06/30/14

EEQ is one of two MLP institutional shares on the market (KMR is the other). EEQ is purely a turnaround situation capitalizing on the fact that cash flow coverage of distributions to partners will improve as more projects come on line with eventual distribution increases as well. The parent of EEQ, Enbridge, is a well-known name that can also drop more projects down to EEQ. However, the primary driver will be the improving distribution coverage.

09/04/14

American Realty Capital Properties

Target Allocation: 7.50%

Core/Overlay: Overlay

Super Sector: Cyclical

Sector: Real Estate

Current Rating: Hold

06/30/15

New CEO taking stock and financials issued on time. Looks like on the path to recovery. Likely to remain in a trading range (i.e. dead money for us) for the remainder of this year or until insight into any future dividend is restored. Preferred stock paying high dividend.

12/31/14

What difference three months makes. ARCP has been the subject of lawsuits, executive turnover, and accounting questions. The dividend has been suspended as well. ARCP is a good example of what can go wrong with an investment. No longer an income and/or growth play. Now a special situation turnaround play. Activist investor, Keith Meister via Corvex Management LP has taken a big stake. Mr. Meister has a well-deserved reputation for unlocking value. On hold for now but don't expect a rapid recovery in 2015.

09/04/14

American Realty Capital Properties, ARCP, has grown rapidly to become one of the largest net (triple-net) REITs in the U.S. It has been on my watch list for some time. I did not buy it because there were no open slots in the portfolio until SDRL was sold. Buy ARCP and collect a yield of 7.54 percent and enjoy some capital appreciation to boot. ARCP is an undervalued REIT that recently bought real estate leased by Red Lobster restaurants. The market did not like that transaction so the stock has struggled since that announcement in spite of great execution by ARCP management. Once the market understands that the transaction was a good deal and that ARCP management is executing according to plan, the discount as compared to its peers should lessen. ARCP is an overlay investment.

10/06/14

NuStar GP Holdings LLC

Target Allocation: 7.50%

Core/Overlay: Overlay

Super Sector: Sensitive

Sector: Energy

Current Rating: Buy < $44

06/30/15

Restructuring plan continues to succeed as dividend has been covered by cash flow for a few quarters now. Still a strong buy as a lot more good things to come.

12/31/14

Unchanged from 06/30/14.

10/06/14

NuStar GP Holdings LLC is the general partner of NuStar Energy (NYSE:NS). NS has had cash deficiencies for years which now appears to be ending. New management has returned NS to its roots as a pipeline and storage terminal businesses which continues to provide organic growth opportunities (especially with growth of oil and gas production in the United States). NSH sports a dividend yield of 5.14% which is among the higher ones within the limited pure GP universe. NSH may also be bought out by a bigger player such as Kinder Morgan . The buyout is just icing on the cake if it were to occur. The thesis here is that the turnaround will result and an increased the stock price with resulting gains like we have seen Enbridge Energy Management .

03/13/15

The Carlyle Group LP

Target Allocation: 7.50%

Core/Overlay: Core

Super Sector: Cyclical

Sector: Financial Services

Current Rating: Buy < $27

06/30/15

Unchanged from 03/31/15.

03/13/15

The Carlyle Group LP is best known for its private equity offerings and it should benefit increasing allocations to alternative assets from individuals and institutions both in emerging and established markets since it has a great reputation for asset performance versus some of the other providers. CG also pays a substantial dividend (currently 7.79%) based on 75-85% of distributable earnings. CG is a partnership so it issues a K-1 instead of a 1099. Within retirement accounts, some of the tax benefits of partnership are lost but there is less complexity since no K-1 reporting is required. If you are putting enough money, to have unrelated business taxable income (UBTI) issues, then investment tax planning is a must.

Closed Positions

Below is the history of sales from the latest to the earliest.

Model Portfolio Closed Positions: 20 Plus Years to Retirement - Nontax Managed

Buy Date

Sell Date

Investment Name, (Symbol) and Other Data

Rationale/Comment

02/03/14

03/13/15

VCA Antech

Target Allocation: 5.0%

Core/Overlay: Core

Super Sector: Defensive

Sector: Healthcare

Basis Gain/Loss%: 69.73

Total Return Gain/Loss %: Same

06/30/15

Sold because the price of the stock had gotten ahead of itself. When the market drops, we will look to purchase this stock again.

12/31/14

Buy price raised to $35 from $32. Expect higher price in 2015.

06/30/14

The stock market swoon is providing an unexpected opportunity to buy stocks at a discount. VCA Antech is part of the medical sector but the focus is on fido and fluffy. If you have a pet requiring major surgery, chances are you have been at a VCA hospital or used a vet that relied on VCA support. People today treat their pets like kids. WOOF is a major beneficiary of this trend.

01/13/14

02/19/15

Alliance Holdings General Partners

Target Allocation: 7.5%

Core/Overlay: Core

Super Sector: Cyclical

Sector: Basic Materials

Basis Gain/Loss%: -3.69

Total Return Gain/Loss %: 4.15

06/30/15

Coal as energy source will be used for a long time.

Sold because of the high chance of increased environmental regulations, the availability of cheap natural gas for the foreseeable future which makes it easier for utilities to meet tougher environmental regulations, and the current valuation concerns. Looking like a good call as the price has been dropping ever since. Will look at again when the risk-reward ratio is better.

12/31/14

Unchanged from 06/30/14.

06/30/14

AHGP completes our holdings in the Cyclical Super Sector. AHGP is the general partner for Alliance Resources Limited Partners (NASDAQ:ARLP). The main product of both is coal which is under attack from the Obama Administration and environmentalists. In spite of the purge to get rid of coal, it will be with us for a long time in electric generation. AHGP has a three year dividend growth rate average of 17.70 percent and has had six years of consecutive dividend increases. AHGP is nice long term compliment to American Tower . Both supply essential service companies but are not limited to the rates of return they can buy.

03/11/14 09/04/14

Seadrill Limited (NYSE:SDRL)

Core/Overlay: Overlay

Super Sector: Sensitive

Sector: Energy

Basis Gain/Loss %: -0.33

Total Return Gain/Loss %: 5.27

12/31/14

Sold because of market trends for drillers. A great company that will be periodically reviewed for future purchases.

06/30/14

SDRL is a deep water driller known for its high dividend yield, high debt, its young rig fleet and its expertise in deep water drilling. Normally a stock with high debt would concern me but after the BP disaster in the Gulf of Mexico, the age of SDRL's fleet is a major plus in that it can command higher rental rates than its competitors because of better safety equipment. The short sighted ness of the market has created an opportunity in that orders for the current year are soft but longer term outlook is solid. Oil prices are stable and the shale oil and gas revolution has not impacted the deep water companies due to US regulations on exports of oil. The company has an order backlog that looks to be stable and is the general partner of a limited partnership. The recent dividend increase may be last one for a while. Company management has indicated that the dividend won't materially increase until the order backlog expands and the market conditions support an increase. I have purchased this security in managing personal accounts for other family members and been very happy. Take advantage of the markets short-term thinking and buy SDRL.

Model Portfolio Rules and Methodology

The portfolio rules and methodology are below:

· The minimum timeline before the portfolio is dissolved is 20 years.

· The portfolio will follow Morningstar super sector and sector groupings. The groupings are shown in the table below (super sectors are underlined):

Defensive

Cyclical

Sensitive

Consumer Defensive

Basic Materials

Communication Services

Healthcare

Consumer Cyclical

Energy

Utilities

Financial Services

Industrials

 

Real Estate

Technology

· The portfolio will be benchmarked.

· A minimum 15% equal stock allocation to stocks in the defensive, cyclical, and sensitive super sectors (45% of the portfolio total).

o Within each super sector, the individual investment allocation can be 15%, 7.5%, or 3.75% as long as the sum equals or exceeds 15%.

o The stock choices will be specifically identified.

o Will maintain at all times except if go to 100% cash or if in the process of changing picks in a super sector.

o Only equity investments (common stock, preferred stock, and/or exchange traded funds) can be a super sector choice.

· The remaining 55% of the portfolio will be considered overlay investments.

o The overlay investment choices will not be the same ones as the core investment choices.

o The overlay investment choices can includes: common stock, preferred stock, individual bonds, mutual funds, exchange traded funds, exchange traded notes or other investments.

· Can go to 100% cash if necessary.

· An investment can move from super sector to overlay and vice versa as long as the percentage limits are maintained.

· Max number of investments is 25.

· Tax implications will not be considered.

· Broker limitations will apply.

Disclosure: I am/we are long ASGN, NSH, T, CG, JNJ, VZ, PCEF, RSP, MOAT, AMT, KMI, SE, ARCP, EEQ, SO.

Additional disclosure: This is an actual money portfolio. Only you can determine if any investment mentioned is right for you.