Static Junk Grade Income Model – LIQUIDATED
By: Tim McPartland,
PORTFOLIO IS LIQUIDATED EFFECTIVE 8/10/2015
As of today we have liquidated this model as we have learned what we can from it and the amount of time needed to keep it updated correctly is excessive.
The ‘junk’ model has run for 2013, 2014 and 2/3rds of 2015 and performed much more poorly than it should have–almost all due to performance of a number of energy related issues. When we set this up it was set up to test junk rated shares as compared to investment grade issues. In the end the junk model performed slightly below (1-2% yearly) the investment grade model–ALTHOUGH the junk model would have performed better if I had time to properly manage the portfolio–meaning that we would have tossed out a number of the energy related issues if we were able to devote time monitoring the portfolio properly.
This junk model had a capital loss of around $30,000 which essentially meant a full years income was lost, but oveer 30 months the return was still around 5%/annually–not so terrible.
THE BIGGEST LESSON HERE IS TO PAY ATTENTION AND DO NOT HOLD ISSUES JUST TO MINIMIZE TRADING.
We had many months ago put together the ‘Static Investment Grade Income Portfolio’ simply to simulate a portfolio of all investment grade preferred stocks and exchange traded debt–put together–never traded and all income withdrawn to be ‘spent’ (no re-investment of dividends). We use the iShares S&P U.S. Preferred ETF as the benchmark to measure this portfolio against.
We wrote about this exercise a couple days ago you can read further on the exercise here.
Taking our research another a step further we have composed the ‘Static Junk Grade Income Portfolio’. We chose the securities pretty much at random (we kicked out multiples of 1 issuer and made sure various industries were represented). The 1 difference in our method was that we did not add in exchange traded debt issues–the majority of the debt issues are investment grade, so the model is all preferred stocks.
We ‘purchased’ shares on 1/2 and 1/3/2013 and we measure against todays prices. No income is reinvested–all withdrawn to be ‘spent’. We had anecdotally noticed that the junkier the issuer the better they behaved when interest rates moved sharply higher earlier in the year. We benchmark using the same iShares S&P U.S. Preferred ETF that we used for the investment grade model.
As some may recall we have a portfolio that we constructed last year with a starting date of 1/2/2013 that is composed of all Preferred Stocks that are either unrated or rated at less than investment grade (junk grade). We last wrote an update in November and there has been substantial improvement since that time. Remember that income issues had taken a bath after the 10 year treasury yield had skyrocketed to 3% from the 1.6% area. It was quite the bloodbath.
Keeping with the premise of this static portfolio this model is never traded (except for special circumstances–such as a call or suspension of dividends). The dividends are withdrawn and spent. Thus the hope is that the original capital (approx $500,000) will remain intact. At our last review on 11/6/2013 the portfolio had a capital loss of $12,866. Monthly income was $3,361/Month. At this time the capital loss is at $5,897 and monthly income is $3,291. The slight reduction in monthly income and the capital loss is primarily the result of the suspension of dividends on the SuperTel Cumulative Preferred. The bottom line with this model is $50,216 income was generated with a capital loss of $5,897 (grand total of $44,319 income if the capital loss is recognized) in 15 months.
The junk rated static income portforlio has taken a ride down and back up in the last 6 months as it holds 6 oil and gas related preferred stocks. All of them got knocked down a huge amount before recovering a good share of the losses in the last month.
The model has a modest capital loss of $3,771 since inception, but is currently tossing off a very high 8.21% current yield. All in all the junk portfolio has performed very well. This is the model we want to watch closely as interest rates go up (assuming they will someday). How much of a capital hit will be taken?
As always the MONTHLY PAYERS are highlighted in grey.