2015/2016/2017/2018 Medium Duration Income with Zip Portfolio

August 30, 2017

This super portfolio ended the 2nd year of existence (was constructed 8/2015) with a 2 years portfolio gain of 16.72%–8.36% per year.  Unfortunately the TravelCenter of America baby bonds have gotten beaten down quite severely and the portfolio as a whole experienced about a 1% loss in the last 2 weeks.

In spite of the TA losses we are super happy with this model and find it to be most attractive to us as conservative investors.

Remember the goal of this model is to trade seldom–although we have to replace redeemed issues.  Additionally we try to have 1-2 REITs or MLPs in the holdings so we have the potential for some added “zip” beyond the basic dividends and interest collected.

September 7, 2016

The first year of this model has ended and the model ended with a gain of just over 10%.  We will continue this portfolio into 2017.

At this moment the 2 REITs in the portfolio (the ZIP) have significant capital gains and as such the current yields have fallen.  We are looking to “book” profits on the 2 REITs and add 2 new high yield issues into the model hoping to capture some future “zip”.  Additionally 1 issue (Ares Capital 5.875% Senior Notes–ticker ARU) is trading at or above $26 and is eligible to be called at any time.  We are looking to sell this issue and replace it with an issue with a coupon that is equal to the 5.875%.

August 14, 2015

Below we have constructed a portfolio that we are calling our ‘2015 Medium Duration Income with Zip Portfolio‘.  Note that the portfolio is constructed of mainly shares of either Term Preferreds and Exchange Traded Debt.  You will see that it is very similar to the highly successful (thus far anyway) 2014/2015 Short/Medium Duration Income Portfolio.

What is the difference between this portfolio and and the 2014/2015 portfolio?  There are fewer total issues.  There are 2 monthly paying REITs. Of the preferreds and the debt issues all but 3 are covered by the Sec Act of 1940, Section 18 leverage rules.  This means that they must maintain at least a minimum asset coverage ratio of 200%–this is an added level of safety for the investor as the company is not allowed to overleverage their assets.

NOTE that this portfolio is small in dollars—around $80,000 to start.  We have intentionally kept it small in recognition that not all income investors have large cash balances.  There are those with small balances that simply want the safe income that this model might produce for them.

It is our intention to not trade this model at all, although if we review issuer quarterly financials and believe they are may have severe financial issues ahead we will exit the issue.  We will accumulate the income in the account and every few months move to invest the cash balances in shares already in the account or buy new issues as they come out.

This model might be appropriate for those looking to reduce volatility, now and into the future, while having a small chance of some capital gains with the REITs we own.  This would be useful when interest rates someday move higher.  In order to reduce volatility and shorten duration one must give up some yield and in this case the model starts with a yield of 6.47%.  If interest rates move higher cash balances will be used to purchase higher coupon new issues–over time the model’s current yield could move higher.

BE AWARE–this portfolio is PRIMARILY designed to provide a reliable income stream.  The 2 REITs add a level of risk, although it is thought to be minimal.

As with all of our new portfolios it starts off with a small loss today (1/10th of 1%), because we ‘charge’ the model commissions on purchases–in this case $8 per trade (our personal Fidelity trades are $7.95–2016 now it is $4.95).  

We note that some of our accounts are set up almost exactly like this model—conservative income issues and a few REITs. We would be overjoyed if we were able to garner gains (income plus capital gains or losses) of 6% annually for the next couple of years, given the hurdles that would appear to be in the economy ahead.


Bryan Perry

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