Income Investor Returns Continue to be Strong
By: Tim McPartland,
Super returns have been accruing to the income investor for many months now and I have to wonder how long this will last. Gains in almost all preferreds and debt issues continue to be strong as investors hunt hard for anything that will pay them more than treasuries and even issues with modest coupons trade strongly. Will shares crash next week or will these gains continue to go on for years and years?
As more preferred stock and exchange traded debt (Baby Bonds) are called the yield a person can reasonably expect to be able to safely garner is becoming smaller and smaller which reduces the number of decent alternatives day after day. You can accept the lower coupons of new issues that are being issued or you can begin to move further out into “risk”. By risk we mean that you have to move to mREITs or mREIT preferreds, master limited partnerships or their preferreds, closed end funds (CEFs) or into other high yield instruments. We can’t see any reason why one shouldn’t get some exposure to some other these higher risk securities. Is there really any choice? We have pondered these moves for months, but honestly we are low risk and being ultra conservative has served us very well for the last 3 years or so. In 2014 and 2015 we watched as others tried to buy MLPs on the way down expecting a “bottom” only to lose years worth of gains when the share prices went to zero By being out of MLPs at just the right time we avoided huge losses and as such we now feel no real pressure to try to be a “hero” by buying super high yield instruments (whatever they may be), BUT we are going to venture into a couple in the days ahead–likely purchasing a MLP or 2.
During May we made no sales or purchases (although we purchased the ARES Management LP 7% preferred shares on 6/3) in any portfolio during the month. The Blended Income Portfolio has a gain for 2016 of 5.88% (the spreadsheet showed a gain of 8.18% on 5/31/2016 which included the gain of 2.3% for 2015 as we simply maintained the same portfolio). We really need to look at the long term performance of the portfolio to keep things in perspective and this portfolio had a gain in 2014 of 9.76%, a 2015 gain of 2.3% and for 2016 through May a gain of 5.88%. These gains are very near our 7% target performance even with 2015 being a tough year. We are pleased and would be more than happy to maintain this performance with the conservative leanings of our holdings.
The Short/Medium Duration Portfolio had a 17 month gain (since inception) of just over 9%. The portfolio has worked exactly how we envisioned it would work when it was constructed and we have 1 of our personal portfolios that mirrors this portfolio. Recall that this has all exchange traded debt issues with a sprinkling of “term” preferreds. The account is not traded, although there have been some issues that have been called and thus some purchases have been made with available cash. Please recall that this website is about learning and experimenting. While we have over 45 years of investing experience the vast majority of our experience was simply in common stocks and mutual funds. Only since 2006 did we become interested in income securities and after 10 years we continue to learn everyday.
Moving on to other topics we find it strange that all the turmoil in the global economy has fallen out of the news headlines The European economy remains extremely tepid with sky high unemployment in most countries. GDP has improved a bit, but it is a slow process. China is no longer the economic engine that can drive world economies as the country has excess manufacturing capacity and has been having layoffs in many of the former economic driver industries (such as steel). Japan–what can one say about Japan? Demographics are terrible and the country’s debt burden is out of this world. South America has Brazil, Argentina, and Venezuela–all basket case economies. None of these items even makes it to the news anymore, which is why it worries us. What surprise awaits us?
Another topic that is pretty low key right now is oil and gas. The destruction of a good part of an entire industry in the U.S. is fairly complete as virtually all of the upstream MLPs have gone bankrupt (although they were a minor part of the U.S. industry), although energy related bankruptcies will continue for another year. While the U.S. is in the energy rebuilding stage, Saudi Arabia and the rest of the middle east are still in a terrible situation. Populations have become used to a certain standard of living that can’t be maintained without vast energy revenues and without doubt there will be social unrest in the years ahead.
So our worries go on and on. Just maybe this is the “wall of worry” that Wall Street likes to climb. Or maybe it is the calm before the storm? Maybe the next panic is just ahead in the markets and we will finally get some “bargains” to buy. Or maybe we just continue in the tepid world of Goldilocks.