November Model Portfolio Performance

Even though we maybe have reached a point where the 10 year treasury yield has backed off a fair amount in the last month from higher interest rates portfolios composed of primarily perpetual preferreds and longer dated baby bonds have struggled to move higher.

Recall that these portfolios were started with $100,000 each and the idea is to seldom trade the portfolios.  It is our assumption that most income investors doen’t do a lot of ‘trading’.

Porfolios with short dated maturities such as term preferreds and baby bonds with maturities in the near future have outperformed their higher coupon ‘cousins’ as they have incurred far fewer capital losses.

Our Enhanced High Yield Fixed income Portfolio now has a gain of 3.42% since the portfolio was initiated on 1/25/2018.  While the portfolio holds many issues with coupons over 8% capital losses incurred as interest rates rose throughout the year.  The portfolio incurred a capital loss of about $2,000 through November 30th–near $1,000 of this loss was from Spark Energy 8.75% preferred (NASDAQ:SPKEP).  With 2 months to go in the 12 month period it is likely the portfolio will end the 12 months with a gain of near 4.5-5%.  Since inception their has been just 1 sale from the portfolio.

The Medium Duration Income Portfolio currently has a gain of 4.09% since the portfolio was initiated on 2/8/2018.  We consider this portfolio relatively conservative-although the issues in the portfolio are all unrated.  We own only issues with maturities dates of less than 10 years and most are in the 2-5 year range.  The short dated maturities mean that the volatility in pricing is reduced and that level of capital losses is kept lower than ‘perpetual’ issues.  The portfolio has incurred a capital loss of about $600, which goes to show that even short dated maturity issues incur erosion in share price, but very much limited.  With just over 2 months to go it looks like 5-5.5% will be attained through 12 months.  Since inception there has been 1 issue called out of this portfolio–no issues have been sold.

Both of these portfolios have had cash balances all year–the High Yield Portfolio has a cash balance of $12,070 (about 11%) while the Medium Duration Income Portfolio has a cash balance of just $4,151 (3-4%).  It is obvious we need a purchase in the High Yield Portfolio–probably 2 to put our cash to work.  We will try to make a purchase yet this week in the High Yield Portfolio.

NOTE–these are not actual portfolios, although the Medium Duration Portfolio is close to the way we have invested the last couple of years.  These are more ‘educational’–for newbies–and even for myself because we have always wanted to ‘try out’ portfolio compositions for experimental sake.

26 thoughts on “November Model Portfolio Performance”

  1. I’ve got GLAD-N and happy with it. As Bob-in-DE and you, Tim, have suggested, seems best to be term preferreds and FtF, at least for now.

  2. With regards to preferred’s, my new “minimum yield” is now 6%. Even that may be a little low and may need to be increased to 6.5%. The 5% stuff in large part is getting hammered the most – even if it’s of the highest quality. Earlier this year, I liquidated all < 6% holdings and I'm glad I did. This inversion of the curve shall pass and I HOPE the Fed backs off before they do any more real damage after December's hike. If they don't back off, we'll all be in for a lot of pain, IMHO.

    1. G–yes you are correct–the exception being those ‘term preferreds’ which hold up relatively well because of the ‘date certain’ redemption.

        1. Yes–my portfolio would be sick without Gladstones–reasonable returns and David G has done a reasonable job.

    2. I would suggest a more comprehensive set of rules. 6% may be fine for a BBB but not for a B-. Also consider term. 6% for a year is not the same as 6% for 10. In effect you should have your own set of yield curves. Start with the treasury yield curve and build on that for the various credit grades.

    1. Don’t fear the K-1. Will few exceptions tax software handles them with ease. As in you input figures just like a 1099.

      Just don’t put K-1 generators in a qualified account, unless you are 100% sure of no UBTI, which you never are.

  3. Tim, first, thank you so much for sharing your knowledge and experience. Really, thank you! I am retired with an adequate size portfolio and have become both weary and wary of common stocks. During the past 2 years I have waded into preferreds, too often with very shoddy knowledge. I follow you daily and also follow Gridbird and Nomad on SA also. I hope that you (and hopefully other readers) might weigh in on a fundamental issue of mine – how safe are preferreds in general? Of course, I know that the question is too broad and that there is a large spectrum. I also appreciate, and have been slammed, by interest rate risk. (e.g. PFF is down 8.01 % YTD – you Tim, are doing great). But am I wrong to regard a BAC or WFC, or NTRS preferred as REALLY safe, i.e. that they can be counted on to pay their dividends and, short of a true catastrophe, can expect that they will hold some reasonable value (of course, inversely related to interest rates)? Also, am I wrong in thinking that NLY and AGNC, with a long track record and pretty effective interest rate hedging, and holding mainly government sponsored obligations, also would carry little (non-interest rate) risk to their preferreds short of a very severe economic upheaval (which I choose to believe is unlikely at this time). I have more unrealized capital loss in preferreds than I would have anticipated, but I’m OK collecting secure dividends. I find virtually nothing regarding preferreds defaulting let alone being liquidated. Is this as rare as it seems to me – and doesn’t this also imply a very low level of risk, particularly for investment grade rated preferreds?

    1. Hi Paullmm–I can’t write too much now, but maybe later. In the last 10 years preferreds have been very safe–with the exception of bunches of preferreds issued by oil producing MLPs-quite a large of them went bankrupt and preferred holders didn’t get a penny. Its fair to say that 95% of them are quite safe (depending how you define safe I guess) and this should continues UNTIL the time we approach/are in a recession.

    2. Paulmm : we sound similar in how we got to preferred stock investing. I also initially invested in too big to fail banks and that unless we have another great recession figure to be “ultra” safe notably JPM-D, BAC-B, and WFC-Y. These can still be a safe, solid investment but they come with another risk, I see or anticipate. Will 5.6% – 6% be enough? It is for me but maybe not for the market. In a normalized rate environment with 10 year TBILL at 4% which is possible given 3.25% high a month or so ago, it may not be. So you face a risk, where the offering is not attractive to buyers and the banks decide not to call them in. If that happens, it may become a true perpetual investment for you or you take a loss of $2, $3, or $4 a share if you want to sell it. So, in my mind you have to look at liquidation risk as well as “market” risk on your invested amount.

      Now, I am a real rookie and brought my 1st preferred issue in March of this year. Others on this site are far, far smarter than me. Just giving you my two cents which may be worth even less.

    3. Paul – if you want no risk of loss of principle or decline in value, it’s treasuries and CD’s. If you look at fixed income through the 2008/9 period, (almost) everything was way down. I’m talking investment grade bonds and preferred being down 40-50-60%. They (almost) all came back (and within a relatively short time) but on paper you took a beating just like stocks. You need to be in a position not to have to sell in a downturn. And have the stomach not to sell, too. If you would have to sell, or blink, you have a problem.

      If you are talking investment grade issues such as WFC or NTRS, they aren’t going away. The default risk is very, very low. Still, you want diversification in the portfolio. Personally, I like a mix of fixed-to-float issues, term dated and some perpetuals. The F2F and term dated give you some protection against permanently higher interest rates.

      Entry points are terribly important for fixed income. Now is an excellent entry point for many issues. Issues that went to market at 25 and had gone to 29-30 are now back at 25 or below. It may get even better in the future depending on the Fed and the economy. However, if you wait for “perfect” thee is a considerable opportunity cost.

      For the m-REITS mentioned, chose carefully and go with the strongest issues. Profits do disappear when the yield curve flattens. I have a very large position in NLY and am looking at others. But I supervise them very attentively. My bet is the Fed is about done with hiking.

      1. I like Citigroup L it is a perpetual but a better interest rate.
        Citigroup, Inc., 6.875% Dep Shares Non-Cumulative Preferred Stock Series L
        Ticker Symbol: C-L CUSIP: 172967333 Exchange: NYSE

        1. You should like C-L. Zero call risk at present price. Not zero risk of being called (it probably will be) just nothing to lose if it is. Very nice coupon if Citi lets it persist past call.

          Have a look at ALL-E while you’re at it.

      2. Thanks Bob. I have been chastened on entry points (wish I knew that earlier). I have recently been adding to those mREIT preferreds judiciously also in the belief that the Fed is slowing down – at least for now.

    4. Paul, here is some data that could give you a birdseye data point you are wanting. This data is over bonds but it is the same for preferreds as they are rated as debt also. Remember one can rate their own bond if they can find the rating of a companies bond. Just drop one peg from junior subordinated debt and two pegs from senior unsecured bonds..This is from S&P and they generally rate in neighborhood of Moodys and Fitch..These data points are average default rates over a FIVE YEAR PERIOD from 2017.
      “A” – 0.57% (meaning less than 1 default per 100 issues over a 5 year period)
      BBB 1.67%
      BBB- 3.44%
      All INVESTMENT GRADE default rate ave – 1.06%
      All SPECULATIVE GRADE (meaning BB+ and below) 16.25%
      This data shows the lower down the pole you go the higher the default risk. Dont believe any SA blowhards who think they are smarter than credit analysts and desregard their ratings. These people think they are smart and arent and get their wallets burned. The above ratings show they do a damn good job. Are they perfect? How can they be, because the ratings are always forward projecting, not rear view mirror analysis judgements. So perfection by this very nature of the ratings themselves would make that impossible.
      “Its tough to make predictions. Especially about the future”…Yogi Berra

      1. Thanks Grid. That speculative default rate of 16.25% is significantly higher than I would have anticipated.

        1. Paul, the couple variables that need to be understood but cant are. How many of above issues percentage wise were say CCC rated debt. And remember this was a 5 year previous window study. And many of the above possible issues that were CCC may not have offered any preferreds. Plus, I would in general would suggest a company with BB- rated preferreds would be in better shape to avoid default on anything, than a company whose senior unsecured is rated BB-. You kind of see some numbers, so it probably just gives you a feel of a general range. Additionally no recession has occurred in past 5 years either…Something to consider.
          I personally would guess allowing for the various other factors that in general ALL speculative rated preferreds are not 16% likely to default and shouldnt imply that. But it serves as a reminder that ratings generally are accurate and the riskier the investment the more chances an issue defaults.

  4. I feel your pain withSPKEP. Yours is a model but I m long a couple of hundred shares. I m trying to juice the yield with a couple of more risky Pfds. The common seems to be hanging in there

    1. Timdman–unfortunately I am also long SPKEP–my worst decision in years.

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