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Why Income Portfolio Downside Control Matters

Dec. 05, 2020 2:50 AM ETARR.PR.C, FBRT.PR.E, DX.PB, DX.PR.C, ECCX, ECCY5 Comments
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  • Welcome to another weekend blog post from Systematic Income.
  • In this brief post we discuss why downside control allows income investors to not only manage the risk of their portfolio but also outperform.
  • Take a 2-week free trial of Systematic Income to explore our Income Portfolios.
  • We will be raising the price of our service in the new year so get in now and beat the hike!

Welcome to another weekend blog post from Systematic Income.

In this post we touch on why downside risk control matters for income investors. In brief, there are two key benefits for investors. First, more muted downside performance conserves capital and allows investors to maintain conviction / remain invested and provides the firepower to rebalance into attractive opportunities.

The second reason why downside risk control matters for income investors is that once the market starts to rally again, those portfolios that fell less during the drawdown don't have to work as hard to perform well as portfolio that fell harder. 

The chart below shows the performance of our High Income Portfolio since inception versus to the popular funds of CEFs and illustrates how this can work in practice. The High Income Portfolio remained pretty stable form August through October while other funds lost value. And once the November rally kicked off the portfolio was able to participate in it, although with a slightly lower beta than some of the other funds. This combination has allowed it to remain ahead of the other funds.

Of course, it's possible that if the rally continues, the higher-beta funds of CEFs may very well move ahead of the High Income Portfolio but if we see further bumps in the road ahead then the combination of its greater downside resilience and good upside capture should allow the High Income Portfolio to outperform well.

What allows the portfolio to maintain its downside resilience? Our suite of Income Portfolios has a number of risk control mechanisms such as senior securities which don't carry the risk of potential discount widening, term CEFs which tend to be more resilient during market downdrafts, more idiosyncratic sectors and others features. 

At the moment we like the risk/reward on offer in agency mREIT preferreds such as (ARR.PC), (CMO.PE) and (DX.PB). We also like CLO equity baby bonds (ECCX) and (ECCY). These securities feature yields of 7-8% and a very attractive profile across income securities with a similar yield.

Thanks for reading!

Check out Systematic Income and take a look at our suite of Income Portfolios designed from the perspective of yield and risk control in mind.

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Analyst's Disclosure: I am/we are long ECCX, DX.PB, CMO.PE.

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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