- Welcome to another weekday blog post from Systematic Income.
- In this blog post we catch up on the performance of our High Income Portfolio which has outperformed nearly all CEF sectors YTD and has powered through the rate rise.
- We also highlight some of our high-conviction holdings across the income space.
- Take a 2-week no-obligation trial of Systematic Income and check out our Income Portfolios and interactive Investor Tools.
Welcome to another weekday blog post from Systematic Income. In this blog post we highlight the YTD performance of our High Income Portfolio in absolute terms and relative to other funds-of-CEF options. We also highlight some of our high-conviction holdings in the income space.
Year-to-date the 10-year Treasury yield has risen 0.61% or about 65% higher than its starting point at the end of 2020. This has put a damper on the performance of many income securities such as income portfolio stalwarts like preferreds, munis and others.
Our High Income Portfolio, on the other hand, has risen about 4.4%. The chart below shows the performance of CEF sectors year-to-date with the red line highlighting the performance of the High Income Portfolio.
The portfolio has put in a very strong performance year-to-date despite not having exposure to the best-performing CEF sectors like MLPs and Equities. The enormous volatility of these sectors plus the low income levels of Equity CEFs and a tendency to deleverage of MLP CEFs makes them poor choices for "real income" portfolios, that is, portfolios that aim to allocate to securities that actually "earn" their distributions through income rather than merely set their distributions at an arbitrarily high level.
Since inception in August of last year, the portfolio has generated very strong returns of around 35% annualized or so.
Compared to popular funds-of-CEFs, for example, the portfolio has more than kept pace - being only second to FOF which is an equity CEF focused fund but it has done so at a much lower volatility and drawdowns. For example, in November of last year, the High Income Portfolio was still up since August while FOF moved to a a double-digit drawdown. Keeping drawdowns in check allows investors to conserve their capital and to be able to put it to work in more attractive opportunities.
The High Income Portfolio has a number of risk mitigants at work that allow it to maintain its capital base relatively well. First is an explicit allocation to lower volatility securities such as shorter-duration assets. And secondly, the portfolio follows, what we call, investment wrapper diversification which is simply an allocation to different types of investment wrappers such as open-end funds, closed-end funds and individual securities such as preferreds and baby bonds.
This lessens the portfolio's exposure to discount volatility. Thursday's CEF price dynamic highlights how this can work. On this day the widening in discounts exacerbated the falls in NAVs for nearly all sectors. On the other hand, the mREIT preferreds holdings, which is a high-conviction allocation of the High Income Portfolio, fell only 0.05% and its CEF preferreds (not to be confused with preferreds CEFs) allocations actually rose on the day.
This kind of risk factor diversification allows the Portfolio to not only generate attractive (and truly earned) income levels but also remain resilient in volatile market environments.
Some of our current high-conviction holdings are AAIC.PC and CIM.PD in the mREIT preferreds space, PRIF.PD and OXLCP in the CEF preferreds space, NVHAX in open-end funds and CMU, NCV and EIC in closed-end funds.T
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Analyst's Disclosure: I am/we are long AAIC.PC, cim.pD, OXLCP, EIC, NCV.
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