Sector Rotation Continues with REIT’s and Utilities Out of Favor
By: Tim McPartland,
Many income securities continue to perform well, in spite of the slow creep higher of interest rates. The 10 year treasury was up 9-10 basis points on the week–just a perfect way to move higher (I mean if they are going to head higher a slow, few basis points a day works out very well).
Owners of utility stocks and REIT’s took a bit of a hit again this week—both of these sectors were too high to begin with and we welcome a pullback in these shares so we can get a chance at something that is paying us for the risk reward. While you might think that REIT’s pay a good dividend we believe it has not been adequate for the risk. Only when we head in to the next recession will it become apparent how much risk is in this sector. The utilities as a business don’t carry tremendous risk, but as an investor we still demand more than the paltry 2, 3 or 4% that these are paying (there have been only 4 issues paying more than 5%)
For the week just ended we only made 1 adjustment to the models. We added Triangle Capital 6.375% notes (ticker:TCCB) to the 2015 Model Portfolio – Blended Income. This add was made based on the 2022 maturity date as much as anything–continuing the move to shorter durations.
Through the first 6 weeks of the year our models are performing almost perfectly. The 2015 Model Portfolio – Blended Income is up .69% (remember it started the year with -.5% because of commissions and timing). The 2014 Model Portfolio – Blended Income is now up 1.73% for the year–an excellent result. The 2014 Short/Medium Duration Portfolio is operating perfectly–low risk, decent reward.
For next week we don’t foresee many moves that we are going to make–except for 1. We have located a $1000 bond which we will likely add to the portfolio–we need to do a bit more due diligence and will write about it tomorrow night. We have never owned $1000 bonds in the portfolio as the pricing visibility doesn’t exist–but we can deal with that issue.