Cleaning up the Blended Income Portfolio
By: Tim McPartland,
September 12, 2017
By Tim McPartland
Long-time readers know we try to identify key learnings from our model portfolios and one which we have known, but not written about, is simply how well a portfolio of 50-60 holdings can be managed.
We think that a portfolio with this number of holdings requires around four hours per week to monitor. It is our opinion that an investor should take the time to glance at the headlines for each of their holdings at least once a week and then spend time reviewing significant news more carefully.
From our perspective, the quarterly earnings always should be reviewed carefully to see if the company is on track with revenue and earnings with no insurmountable challenges identified.
Our Blended Income Model Portfolio, which has had between 50-60 issues in it, simply is too broad for us to manage very well. Unlike many of our readers, we are not retired, and it takes more time and energy to manage as broad of a portfolio as we have available.
Additionally, the broader and more diversified the income portfolio, the more mediocre the return. Certainly, the broader range of securities owned helps reduce the risk in the model, but one questions whether the broad diversification outweighs the risk undertaken when one can’t monitor the issues closely enough. Fortunately, as much as we have lacked time to manage this portfolio, it is on track for a three-year return of 7% annually, which is a decent return during these times of 2-2.5% 10-year treasuries.
With the above in mind, we have sold the following issues from the Blended Income Model Portfolio. Each of the issues have been losers in the model.
The RAIT Financial Trust 7.625% Notes (NYSE: RFT) are aimed at giving debt financing to a real estate investment trust (REIT) which is in the process of a major change in its business model. Its common shares are trading at 59 cents and we don’t have the time to monitor this issue daily.
FS Investment Corp. (NYSE: FSIC) is a business development company (BDC) that has seen its share price fall by 20% in the last seven months. We owned the common shares. FS, like many other BDCs, is experiencing higher repayments on the loans it has made and cannot find as many investment opportunities as are needed to make new loans. FSIC already has stated that it intends to cut its distribution in the next quarter.
Medical Facilities (OTC: MFCSF) is a relatively small Canadian company which owns five specialty surgical hospitals in the United States. Interestingly, the company has performed quite well, but the share price in U.S. dollars has performed poorly. Additionally, while surveying the model looking for issues which could be sold to refocus our attention, this issue simply no longer held our interest, so it was sold.
With the sale of these issues, we have raised our cash position in this model to almost 19%, which is obviously way too high. We all know that to maximize portfolio returns, you need to be more fully invested. This is a problem that all income investors have faced for the last number of years as issues are redeemed and new issues are being sold at coupons that are ridiculously low and in no way reflect the risk inherent in junk issues.
In the next two weeks, we will post an article on new investments for this portfolio. It is highly likely that we may simply add to current investments, thereby maintaining a smaller number of issues which are more manageable. Additionally, we are looking at a couple of other poorly performing issues to determine whether they should be sold. These processes will continue until we reach a manageable number of investments.