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Cleaning up Our Blended Income Portfolio

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By Tim McPartland

As long-time readers know, we always have maintained model portfolios on our various websites to help us explore the best portfolio construction that will meet our needs.

These models are learning tools and help display various possibilities. In early 2015, we built what we called the Blended Income Model Portfolio, consisting of various income securities such as real estate investment trusts (REITs), master limited partnerships (MLPs), closed-end funds) CEFs, common and preferred stocks and baby bonds.

The combination offers a truly “blended” model. The most obvious mistake we have discovered with a portfolio constructed like this one is that if you are going to hold 40-60 various securities, you need to devote substantial time for at least a weekly review of your holdings.

Simply buying securities and only checking on them occasionally is an expensive way to invest.  Quite simply, holdings can “go bad” and, if you are not paying attention, you soon will forfeit hard-earned gains.

While we have had some real clunkers in this portfolio, it has performed just above our goal of 7% annually. We are averaging about 7.5% annually since the portfolio’s construction (I recently corrected a formula error, which added 1% to the three-year return). Quite obviously, if we had more time to follow this portfolio, the returns would have been much better.

Our largest dollar mistake was purchasing a master limited partnership, NGL Energy, which had fallen by 50%. We assessed that it was bottoming in price, so we doubled up our position a short time later. Shares then fell by another 60%. We still hold the positions, since time may yet let us recoup our losses. Regardless, we have an unrealized loss of just short of $5,000. Of course, there have been many other losers, but none so memorable.

On Jan. 30, we sold the AmTrust Financial 7.25% perpetual preferreds (NYSE: AFSI-B), in which we had a loss of about $2,000. As many readers may be aware, AFSI is closely held and there is a proposal to take the company private. The preferred shares of the companies’ six issues have been decimated amid the thought that the company may discontinue paying the preferred dividends, since they are non-cumulative. We anticipate this issue will be with the company for a long time and we don’t plan to hold on just hoping that this is resolved soon.

Also, on Jan. 30, we sold our shares of REIT Blue Rock Residential REIT (NYSE: BRG), in which we incurred a loss of over $2,000 as well. BRG was a newer REIT when we purchased shares initially and they performed well, but recently the REIT has changed the dividend from monthly to quarterly, as well as reduced the payout by 40%. It is long past time to move away from this company.

We continue to hold a few marginal positions. We are studying REIT New Senior Investment (NYSE: SNR), an owner of senior living facilities, which has been beaten down in a way similar to REITs and senior housing investments in general. We expect that this difficulty will continue for some time to come, but we have not yet determined whether to sell the shares at this point in time.

So, in summary, we have sold some losers from the Blended Income Model, which brings total cash in the model to over 22%. We will continue to try to monitor this portfolio closely to help alleviate large losses. Additionally, we are looking to add a couple shorter maturity baby bonds in the next week to get some of the cash redeployed.

We expect this will be a difficult year for income investors as rates creep higher and fixed income securities move somewhat lower in price, but we will continue to fight to achieve our target of a 7% annual return.

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