2013/2014/2015 Investment Grade Income Portfolio (Model) – LIQUIDATED
By: Tim McPartland,
EFFECTIVE 8/4/2015 THIS PORTFOLIO HAS BEEN LIQUIDATED
We have liquidated this portfolio because we feel we have learned all we can from it (with 1 exception) and we are always pressed for time to adequately maintain our models. The intent was to build a portfolio which was to not be traded and was composed of only investment grade preferreds and exchange traded debt. All income is ‘spent’.
So what did we learn?
- You must re-invest funds from redeemed issues. To overlook this is just throwing money away
- A portfolio of investment grade issues requires minimum oversite
- Interest rate movements in a range of 1/2 to 1% (on the 10 year treasury) may well not affect capital balances over time
- This portfolio is substantially superior to a Closed End Fund in terms of ‘safety’
So what didn’t we learn?
- How will the model react to much higher interest rates?
This was a key item we hoped to learn from this model, but it will have to wait for another time.
This model tossed off a nice 6.3 to 6.7% income stream and fully maintained the original starting balance of $500,000 (and actually had a small capital gain) over the course of 31 months. This was exactly what we intended the portfolio to do and we succeeded.
Some months (many months) back we built a Preferred Stock/Exchange Traded Debt Investment Grade Model that is not ever traded and dividends are NOT re-invested. This is to simulate a fixed income portfolio of ONLY investment grade preferreds and exchange traded debt issues where the dividends/interest are taken out as income each month. The portfolio remains fully invested at all times and the only time a new purchase is made is when an issue is called (redeemed) and the proceeds need to be re-invested.
The issues in this model were essentially picked at random from the universe of investment grade issues available on 1/2/2013. They have an simple average coupon of 6.41% (a current yield of 6.81%) and on the $500,000 starting balance throw off a monthly income of $2613.
Looking at the model through 3/28/2014 we can see some changes have occurred since we last wrote on the model. At this time the Investment Grade Model has a capital loss of $22,025 (back on 11/6/2013 it had a capital loss of $41,313 so it has improved greatly in 5 months). Since the model was built on 1/2013 approximately $39,010 in dividends have been received. 1 issue was called and that issue was replaced by another investment grade issue at a coupon that was 1.25% lower. Thus our monthly income has been a bit reduced and now is $2,550/month.
The iShares Preferred Shares ETF has a capital gain of $4,392 over the same time frame. Additionally the ETF paid a large end of 2013 dividend which moved the monthly income up to $2,620/month. NOTE–this monthly income might be inflated as the large end of 2013 payment may inflate the monthly income on a 1 time basis (we have to adjust this income amount as the ETF pays a varying amount each month).
It is interesting to note that if you are planning to buy just investment grade issues that you might be better off to consider simply buying the ETF and saving yourself a lot of trouble.