Reviewing Portfolio’s

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It was a wild up and down market (both stocks and interest rates) during October, but in the end things worked out about as well as could be expected for us.

Our 2014 Model Portfolio ended the month at a gain of 10.96% YTD–just a few basis points below the high for the year.  We continued the move we started months ago to shorten durations and raise the quality of the portfolio, although we did more selling than buying, thus ending up with 13.49% cash which is beyond where we really would like to be cash wise.  We sold a number of what we believe are low quality pertpetual preferreds–Campus Crest, Costamare, Seaspan and Legacy Reserves.  Potentially the proceeds will be reinvested at a slightly lower yield than the issues that were sold, but we believe it is the time to raise quality of the portfolio just a bit.  We bought just 2 issues–term preferred Oxford Lane 8.125% and BDC FS Investment (which has a nice 8.5% current yield and is investment grade rated).  We have lowered the percentage of the portfolio that is devoted to perpetual preferred by more than 5% in the last couple of months. Remember that when interest rates rise (someday) the perpetual preferreds are likely to get butchered—but the degree of capital loss will depend upon the speed of the rate of interest rate movements as well as the absolute level to which rates move.

Our Static 2013/2014 Investment Grade Modelmoved to the highest level ever.  This reflects the preference of most investors to move to quality a bit. Recall that we ‘spend’ all of the earnings from this model, thus there are no dividends to reinvest.  The capital in this account is almost 2% higher than where it started in 2013 while the model tosses off 6.1% current yield (6.21% on cost).  This $500,000 model pays $2430 in monthly income.

The Static 2013/2014 Junk Grade Model hovers around original cost–just off around 1/3% since inception (January 2, 2013).  This portfolio is hurt by holding some lower quality issues–including shippers and crude oil exploration and production companies which have sold down in the last number of months.  While the capital of this model has underperformed the Investment Grade Model, the income tossed off each month is substantially higher at $3,247.  At this point in time it has still been vastly preferred to be in the Junk Issues.

The Static Portfolios are NOT traded and except when issues are redeemed there is little cash carried in the accounts (although each has a little cash on hand from redemptions which should be reinvested).

Lastly we built a Short/Medium Duration Model on 10/13/2014 which is intended to have reduced volatility while still producing a reasonable amount of income.  This model has a current yield of 6.68% and is composed of term preferreds and exchange traded debt issues which all mature within the next 13 years, with most issues maturing in 6-7 years.  This model traded in a tight range of plus and minus 1/3% in the last 2 weeks.  It will be interesting to see how this model performs against the other models as we move to a higher interest rate environment.



Bryan Perry Dividend Income Expert Bryan Perry

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