We Wrap Up a Full Year In the Short/Medium Duration Income Portfolio

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A year and 1 day ago we determined it might make sense to construct a portfolio meant to garner income with no regard, or attempt, to produce any capital gains.  Additionally, we wanted it to be constructed with securities that would mature in 10 years or less (1 issue is actually 12 years).  Thus the 2014/2015 Short/Medium Duration Income Portfolio was born. The shorter duration was meant to reduce volatility on a week to week–or even year to year basis.  Our assumption at the time was that the shorter duration would produce much better returns than a portfolio constructed of long term exchange traded debt issues or perpetual preferreds.  We know that this would have proven to be true, but exactly how much better it would perform remains a bit of an unknown simply because we did not get the rising rate environment that we (and everyone else) assumed would occur during 2015.

So here we are a year later and while we did not get the interest rate increase that we believed we would get the results are nothing short of outstanding.

The portfolio ends the 1st year with a gain of 6.62%. Additionally this was accomplished with only 3 portfolio sales and 4 purchases. Granted this is a small portfolio–a starting value of just $85,000, but this could have readily been accomplished with a somewhat larger amount of capital by either adding a few more issues or by buying a few more shares of each issue.

The 3 portfolio sales were composed of 2 issues that were called and 1 issue which we became uncomfortable with as the BDC MVC Capital has not filed a 10Q (quarterly report to the SEC) for many quarters and in fact has not even filed their 2014 10K (annual report to the SEC) because of issues with a portfolio company. While the MVC Capital issue (ticker:MVCB) is only 3% below our sale price we were uncomfortable holding a issue that was not able to file their required reports. Given the conservative nature of this portfolio it was best to let this issue go.

The 4 purchases were simply replacements for the above sales (4 issues instead of 3 as we reinvested the dividends and interest for the year).

We note that our Affiliated Managers 5.25% Senior Notes (ticker:AFW) have been called for 10/22.

When the portfolio as originally constructed it had a yield of 6.70%–at this moment it has a current yield of 6.65%.

At this moment we see no changes that need to made to this portfolio–BUT if the economy softens we will be looking to move UP the quality spectrum.  We would sell lower quality issues and buy investment grade issues which would make our job much more difficult as the number of short/medium duration investment grade issues available is small in number—but we would do the best we could.

It is our intent to continue to run this portfolio as it has proven successful, but has not been through a rising interest rate environment (what has been? Rates have been dropping for over 30 years).

BUT WE MUST CAUTION THAT IN A SOFTENING ECONOMY THE WEAKEST COMPANIES IN THIS PORFOLIO CAN BECOME DANGEROUS AND WE WILL BE REVIEWING OUR HOLDINGS ON A CONSTANT BASIS. JUST BECAUSE THIS PORTFOLIO IS ‘BORING’ DOESN’T MEAN IT CAN BE IGNORED.

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