2014/2015/2016/2017 Short/Medium Duration Income Portfolio

October 13, 2014   10 pm

Below we have constructed a portfolio that we are calling our ‘2014 Short/Medium Duration Income Portfolio‘.  Note that the portfolio is constructed of only Term Preferred shares, or in shares of exchange traded debt issues with maturity dates that are less than 10 years out.

We have constructed this model to minimize volatility, while still producing a reasonable amount of income.  This portfolio is very similar to one we have constructed for ourselves in one of our retirement accounts.  So far this year we really have come to appreciate having an account which doesn’t move too much day to day, but yet tosses off decent income.

NOTE that this portfolio is small in dollars—around $85,000 to start.  We have intentionally kept it small in recognition that not all income investors have large cash balances.  There are those with small balances that simply want the safe income that this model might produce for them.

It is our intention to not trade this model at all.  We will accumulate the income in the account and every few months move to invest the cash balances in shares already in the account or buy new issues as they come out.

Because we constructed this model quickly and have not taken time to scale into the investments we have purchased some issues that are trading a bit above par (plus accumulated dividends and interest).  In a perfect world we would purchase only issues trading at $25 or less–but this is not a perfect world.

This model might be appropriate for those looking to reduce volatility, now and into the future, while preserving capital.  This would be useful when interest rates someday move higher.  In order to reduce volatility and shorten duration one must give up some yield and in this case the model starts with a yield of 6.70%.  If interest rates move higher cash balances will be used to purchase higher coupon new issues–over time the model current yield will move higher.

BE AWARE–this portfolio is NOT designed to garner capital gains (or losses).  The intent is reasonable income with a reduced level of volatility.

Update 3/1/2015 – this conservative portfolio has garnered a gain of 4.03% in the models first 4 months. Of this gain 1.1% has been from capital gains. This model is not expected to have capital gains to speak of, but very conservative issues like Tortoise Energy Infrastructure (ticker:TYG-B) 4.37% term preferred is up more than 5% in the 4 months. This model is not to be traded–but during January we had 1 issue called and as such we replaced it. The model was set up with a current yield of 6.70%, but because of the capital gains now has a current yield of 6.64%.

Update 7/24/2015 – this conservative portfolio has now garnered gains of 5.74% through about 9 months (the portfolio was launched last October)–a extraordinary performance and exactly what we were hoping for when it was built. The SP500 is up 1.66% YTD and total bonds are around breakevern. We have lost a bit of ‘juice’ because we are holding over $8,000 cash in the portfolio–from dividends and called issues.  We will attempt to get this deployed in the next couple of days.

Update 10/14/2015 – we have wrapped a full year now with the conservative income portfolio and I couldn’t be more pleased with the results.  We have updated interest and dividends received through today and we end up with a nice gain of 6.62% (corrected to 6.20%) for the 12 months.  There were 3 sales and 4 purchases in the portfolio for the 12 month period.  It is our intention to continue this portfolio into 2016.  Current yield is 6.65%.


Bryan Perry

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