A Review of August – Hanging In and Hanging On

September 7, 2015

It’s time to review the performance of the various portfolios and see how they did during the most treacherous August that we have had in many a year.

1st of all we review the relatively diversified 2015 Blended Income Model Portfolio. This portfolio had been up earlier in the year (in June) by as much as 4.75%—that gain is now far in the rear view mirror.  When this year started we felt confident that it would be a very difficult 12 months for income investors and thus far we have been right on the mark.  Of course no one can foresee the future with any level of confidence, but even a blind squirrel finds a nut on occasion.  So we end August with a YTD gain of 1.18%. While this gain is much better than the S&P500’s loss of a 4% YTD or the iShares Aggregate Bond Fund performance of -7% YTD we had hoped for better.

For the month of August we executed only 3 transactions in the portfolio.  We made an initial purchase of REIT Stag Industrial (ticker:STAG) and added to our position in 1 of our Canadian issues, Sienna Senior Living (Ticker:LWSCF).  Notably the Stag Industrial purchase was made at a time when the shares were trading 35% off of their 52 week high and appeared to be at good point in which to make an entry into this high quality REIT.  Of course the shares dropped right after purchase and are off over 10% since purchase and we are thinking ‘if they were a bargain at $19 they must be a ‘steal’ at $17′ (but we are not buying more quite yet). Lastly we lightened up on our Proshares Ultrashort SP500 (ticker:SDS) hedge position by 25% as the S&P 500 moved closer to our perception of ‘fair value’. Whether this was a good move will only be known in a month or two

We have positioned ourselves pretty much where we want to be in portfolio—minimal perpetual preferreds, expanded exchange traded debt issues and a good dose of term preferreds.  While we have been early in moving out of the perpetual preferreds that move has likely only cost us just a few hundred dollars in lost dividends as we were able to replace the income with reasonably good exchange traded debt issues. The real pain has been in the REITs and common stocks. We had losses in each and every issue held in these sectors–although they were mitigated with the Proshares UltraShort SP500 hedge which was in place. We ended August with approximately 15% in our cash position, which is right about where we want to be (really 15-20% in cash). We have said many times before that ‘you have to be in the game to win the game’, but maybe now is the time where we will ‘suspend’ that saying.

On happier news we will take a look at the 2014/2015 Short/Medium Duration Income Porfolio.  This portfolio was composed in October 2014 with the intention of using only securities with shorter durations (only exchange traded debt and term preferreds) and not trading it. The model was set up with an initial coupon of 6.7% and while the return has been up as much as 6%, since inception, we ended August with a YTD gain of 5.45% as market volatility set us a back a bit from those higher levels.  MVC Capital 7.25% senior notes (ticker:MVCB) were off 5% as the company has had trouble closing the books for the last number of quarters causing a large chunk of the monthly setback as investors tired of the situation.  After the close of the month we unloaded this issue. While it is our intention to not trade this portfolio we aren’t going to knowingly sit and watch poor issues potentially fall bunches without acting on it. With our performance through 10 months we are hoping that this porfolio will end over 6% higher for the year period, which would be tremendous performance for this dangerous year in investing.

Last month we formed a new portfolio we called ‘2015 Moderate Duration Income Portfolio with Zip’ which simply is a relatively conservative portfolio of baby bonds and term preferreds with 2 REITs tossed in for capital gain potential. We have not received dividends or interest on this portfolio as of yet and with the last 30 days being very wild the model was off a little at the end of August, but we are not concerned because once interest and dividends start to come in some of the swings in REIT prices will be countered with added income.  We will review this portfolio in detail next month.