Just taking a quick review today and walking through each holding and some of my logic (or maybe illogical) thoughts on the holding.
Honestly I need a more structured look at each of my holdings–coupled with what I hope is logic to figure out where I am and where I am going.
‘Asset Managers’ is the 1st category on my ‘list‘. This is a small category with around 5% of the total holdings.
The offerings of income issues are relatively sparse in this category, but I have always been drawn to the Affiliated Managers issues–mostly to the 5.875% (MGR) baby bond since it has the earliest 1st call date and my thought was that at the point of lower interest rates it might get called and I would get a decent capital gains. My logic kind of worked well and in 10/23 I added shares @ $20.59. Interest rates started falling in 2024 and in October, 2024 I unloaded 1/2 my shares for $24.92. With the benefit of hindsight I should have sold it all. When I sold it I thought it was peaking and was fearful of the long dated maturity in 2059 and the thought was that interest rates might start moving higher again and send my shares tumbling. Obviously the price did tumble and now trades at $22.25. Certainly there is upside potential for a capital gain–BUT it will take much lower interest rates to move the price higher. We’ll see what happens, but I am maintaining my 1/2 position for now.
I had held shares in giant asset manager Apollo Asset Management 6.375% preferred (AAM-A) which was bought in 2022. This was originally an Athene (insurance company) issue which Apollo acquired. This issue was called for redemption in 9/2023 which gave me a total gain of about 18% in a little over a year.
Lastly, in this category, I have shares in the 4.875% baby bonds of Hennessy Advisors (HNNAZ) which have a maturity date in 12/2026–so still 20 months out. I have held some of these shares (bonds) since they were first issued in 2021. Even though the maturity date on this issue is relatively near the share price has moved up and down more than I imagined it would ever do. In August 2023 pricing moved lower by 10% and I added to holdings 3 more times down in the $22.25 to $22.55 area. Over the course of the next 6 months the price moved higher until I sold the vast majority of shares at $24.37 capturing a nice capital gain plus interest along the way. With a 4.875% coupon it was unlikely to move much, if any, higher with 2.5 years left to maturity. The price did fall back in April, 2024 so I added back some shares @ 23.35 which was near an 8% yield to maturity. Now it is trading at $24.22. I could sell for a nice gain–BUT there is no reason to believe that the price will fall significantly from here with less than 2 years to maturity. Yield to maturity at this time is in the 6.8-6.9% area–so I would be open to buying more of this issue. Certainly the YTM is better than a CD by bunches–yes I am going to see if I can snag a bit at a little lower than the current price. It is thinly traded as almost all issues are–and the spreads are typically wider than I would like to see so I may never execute a buy–we’ll see.
A note on Hennessy Advisors–this is a small company with total assets under management of $4.8 billion which generates revenue of around $9.7/quarter. (not very big). The company has been buying other funds and rolling them into the Hennessy Funds. These incremental assets have been extremely profitable and recent earnings were very strong. Their latest earnings are here.
Tim, there has been a lot of us followers who wanted to know how you have went about picking the stocks you hold and your reasons for holding or selling.
I know from what you have written you do research the companies that issue the stocks and baby bonds.
I am glad you are “thinking out loud” and going over your reasons.
I would actually look forward to more of your thoughts on the different sectors you invest in.
I have been grateful for others posting on this site what they hold and their reasons for holding or selling.
Not everyone is going to invest in the same areas of the market. For example at one point several years ago you held various bank preferred then sold out of that sector. I felt at the time you might have been throwing out some babies with the bathwater, but you said you preferred to be cautious.
Added to my position in cumulative SCE/PRM @ 23.90 for a CY of 8.04% and 4.4% gain upside if rates drop. Call protection through Nov 2028.
I noticed the common trading up substantially so assume some good news came out regarding the fire.
For similar yields I would much rather be holding a utility preferred like this one, fire risk aside, than BDC’s and mortgage REITS. Who knows what happens to these in a downturn.
Dan – I have always shied away from these issues because of fires etc. Maybe I need to look again and consider a ‘taste’.
My strategy is to limit any utility company to a total of 1% of my net investable assets. Buying a wide range of different utilities due to the risk of climate-related activities (goal being 20 companies). I do agree it is a risk that you need to be aware of coupled with the ability to defer interest payments.
Utes have less downside risk in a crash because utilities are not the first thing people give up. Though I avoid California utilities for other reasons.
Dan, recent WSJ article published end of last week ……….
The Prime Suspect Behind California’s Eaton Fire: A ‘Zombie’ Power Line’
An investigation by utility Southern California Edison is increasingly focused on whether a decommissioned line was re-energized, sparking the deadly blaze.
Key Points
SCE is investigating whether an idle power line sparked the deadly Eaton fire in Los Angeles, a rare occurrence that could have major liability implications for the utility.
SCE is reviewing its safety practices for inspecting and maintaining its 465 miles of idle transmission lines after the Eaton fire.
California regulators are considering the issue of idle transmission lines after the Eaton fire, which could have implications for other utilities in the state.
I’ve gone in on the SCE preferred cumulative issues as I did with the Hawaii Electric when they had the Maui fires and there was fear. My estimation is that the state will not allow the company to fail. CA now has a fund to assist with fires to a degree and my recollection is that there was a fairly recent court ruling against insurance companies attempting to limit losses in some CA locations.
PCG did cut dividends for 4-5 years and eventually paid them. If SCE is assigned most of the blame, we’ll see a big hit to preferred issue prices, possible dividend halts in the short term and maybe a greater buying opportunity.
Same page as Dan but do understand the concerns presented. A different variety of risk that I think will be addressed holistically and largely addressed at some kind of cost. States cannot sustain massive, tragic events like this every few years and a solution needs to be engineered across the industry.
Yield Hunter. It’s not just the states it’s also the federal government and insurance companies. The past week we have heard about wildfires in Texas and tornadoes and hail storms in other parts of the country. In our county people along the river have been flooded so many times that FEMA said they will not longer pay for emergency help with rebuilding. At some point does the Federal government say that it will not longer pay for recovery from natural disaster? In a way, the people who pay for the electric will end up paying.
It’s a good point, there is no way the government can bail out every disaster. I wasn’t aware of these latest fires and storms.
It is definitely the consumers/landlords that pay for the electricity that are indirectly paying for the disasters and mistakes that may or may not have been made by utilities. I pay utilities for their services as well as a consumer. Many have quasi monopolies and are embedded with politics and infrastructure. They are difficult to swap out. The state I was living in and renting properties in definitely passed on storm damage and upgrade costs to it’s customers.
YH you know, year after year I hear about the damage from ice storms in the Northeast, and hurricanes in the Southeast and I wonder who is paying for all the damage that happens and of course the answer is the rate payers and the insurance companies
I don’t think your CY calculation is quite right: 25.00/23.90 * 7.5 = 7.85% CY
the first dividend of 2024 for this issue was not the same as the rest as it was issued in nov 2023 so that prob through off everything. my automated yield tracker is wrong also.
David you are right. Thats my fault for relying on Schwab’s calculation! Gosh they can’t seem to get anything right. They even “show the math” of 1.88/24.23=8.04% when you click on the i which is still wrong even at the higher share price!
Misleading and unexpected, perhaps, but I’m not sure they are wrong. I think they might be properly accounting for the fact that the dividends are actually paid quarterly rather than annually. If you were to reinvest these dividends at the original 7.85%, you’d in fact get a final return very close to the claimed 8.04%. Using Google Sheets, =EFFECT(7.85%, 4) gives 8.08%.
a final return to what date? Calculating plain old current yield, 1.875 (the non rounded annual coupon for a 7.50% $25 issue) divided by 23.90 = 7.845%.
Interesting point Nathan but they actually show the formula in the tooltip as
1.88/24.23=8.04%
Which actually equals 7.8%
I sent them an angry note. We need to be able to trust basic data at our brokerage. I get some stuff like foreign OTC securities will have data issues but come on. This is basic math!
I feel like the comments on Tim’s post have gotten off track. Even my comment on SCE and utilities risks..
Can we focus on what Tim had mentioned, reasons for holding, selling, short term or long term duration etc.
Can we move the comments on spread sheets and calculated yield to the sandbox.
I hope I’m not upsetting anyone with my request.