Adding to the Model Portfolios
By: Tim McPartland,
As March has worn on we had accumulated too much cash in all of the model portfolios and have made some moves to get the money deployed.
Readers recall that back in 2015 we had put a high emphasis on purchasing shorter duration securities while minimizing perpetual preferred stocks. In the latter part of 2015 we began to move slowly back into a few perpetuals as long term rates remain very low–and likely will stay down for the balance of 2016. Since the Fed Funds rate increase in December, long term rates have fallen by 35% basis points–the global economy simply will not be strong enough to justify higher long term rates. The narrowing of this interest rate spread (higher short term rates and lower long term rates) has been harmless to our income investing although when/if the spread narrows further we will have to consider whether the next recession is finally at hand.
In the last week we made 2 purchases in the Blended Income model portfolio. 1st off we added an additional 100 shares of the Tri-Continental 5%preferred stock(NYSE:TY-P). This $50 issue is meant to be a low volatility, super safe holding. The shares are trading at just over $52/share now and is callable at anytime. Fortunate for holders the call price is $55/share and since these shares have been outstanding for over 30 years it is unlikely they will be called anytime soon. Next we added shares of the new KKR & Co preferred shares(NYSE:KKR-A). It is rare in recent times to be able to purchase a issue of this quality (BBB+) with a coupon of 6.75%. This issue continues to trade on the OTC Grey Market at a price of $25.05/share. We expect this issue to move higher once trading on the NYSE commences.
These 2 purchases bring our cash position to 8.82% in the Blended Income Model.
In addition we made a purchase of the Prospect Capital 6.25% notes (NYSE:PBB) in the Short/Moderate Duration Income Portfolio. These shares, which mature in 2024, fit nicely in this portfolio as they have a current yield of 6.89%. The portfolio had accumulated cash from the recent redemption of the Tortoise Energy Infrastructure term preferreds (NYSE:TYG:B). This portfolio now carries a current yield of 6.80%.
Our portfolios have performed admirably in March as most markets sprang back from weakness early in the year. The Blended Income portfolio has a gain of 4.44% in the 15 months of existence, while the Short/Moderate Duration portfolio has a gain of 6.91% since inception in October, 2014. Both of these portfolios have outperformed the S&P500 and the Total Bond Fund (NYSE:AGG) by a wide margin as these benchmarks are just around break even over the same time frames.