The Tale of 2 Portfolios

As most of you know for years (more than 10 years) I have always had ‘Model Portfolios’.  These are not ‘real’ portfolios, but typically they mirror my personal investments.

Our intention is to not ‘trade’ the issues in the portfolios – of course sometimes an issue gets redeemed or called and you have to make small changes to replace the issue.

These models are meant to be ‘teaching’ or ‘learning’ portfolios–they are long term ‘what ifs’.

10 months ago we started the “Enhanced High Yield Fixed Income Portfolio“.  In general this model contains only issues that would be considered by conservative investors to be pretty aggressive with higher risk.  The portfolio was doing just fine until recently, but now is down 4.61% since 1/25/2018.

Newer investors can look at it and see what would have happened if you were to play only in the high yield arena.

In February of 2018 we started the “Medium Duration Income Portfolio“.  This model is composed of term preferreds and baby bonds with maturities in the next few years.  There are a few other miscellaneous issues in the portfolio.  Issues in the model are not investment grade, but with maturities in the next few years it is less volatile and prices generally hold up fairly well.  The model has taken some hits in the last month, but now is up 1.74% since 2/8/2018.

So you can see that the more conservative portfolio is 6.35% better than the aggressive portfolio.

While I had invested like the more conservative portfolio until a few months ago when I purchased some perpetual preferreds.  With the benefit of 20/20 hindsight we would have been much better off staying with all the short dated maturity issues.

39 thoughts on “The Tale of 2 Portfolios”

  1. Steve I have held this and flipped their other trust preferreds in past before.
    A 6.45% trust preferred is actually cheaper for a bank than a 6.0% QDI issued preferred. Why? Because BoA gets to write off the 6.45% interest payment as a tax deduction while a 6.0% QDI is after tax cash payment.
    Banks liked issuing these because they got to issue debt and treat it as capital and get a tax deduction as a bonus. This has largely been shut down. Most of these big bank market trust preferreds have to be phased out in next year or so unless they were TARP exempted. I dont know whether MER-K is subject to TARP protections or not. Technically they wouldnt be mandatorily redeemed, but just could not be used for Tier 1 capital.

    1. Thanks now it makes sense why they didn’t redeem this issue earlier this year.

      I will bear this in mind if I decide to dip my toe with the understanding it will have a reasonable chance of being called.

  2. Anybody familiar with Merrill Lynch Capital Trust 1 (MER-K). Upgraded by Moody’s in Dec 2017 to BAA3.

    My specific question is Bank of America called preferred issues paying 6.2% earlier this year.

    This pays 6.45% and should be callable. Why would Bank of America not call a higher yielding instrument. Is this not callable at this point? This issue has been incredibly stable during sell-off. Maybe it’s turn to get hit occurs tomorrow or maybe I don’t understand this offering.

    Any insight would be appreciated

    1. Ray,
      The issuer of MDLX, MDLY, is involved in a complicated merger that is now in doubt. In addition, one of the larger investing services on Seeking Alpha, the one run by Rida Morwa, had recommended buying the sister baby bond, MDLQ, a few weeks ago, and changed that recommendation to a sell today. So both MDLQ and MDLX, along with the issuer, MDLY, were down strongly today.

      1. Hi, thanks so much for this information. I know the income markets were tanking, but I would not find why this one was falling so much. If Rida was able to influence this, that is quite amazing. I do not subscribe to him, but I do to another.

        1. Ray, he is a walking wallet flattening disaster. Just look at all his articles the past year. If you have a problem with a fat wallet, he can flatten it in no time..Recommending 2X levered notes down close to 50%, CBL recos were even worse, AMID lost that in about 3 days after his reco. And this is just the beginning, off top of my head. I have never traded from his recos and am wealthier for it. I wouldnt let him pick my boxers to wear for the day.

          1. And his lacky PendragonY spends the whole day defending all of Rida’s picks as ‘long term’ holds that will perform as long as you don’t sell–Ha.

            1. Tim, just like Wheeler and its preferreds are…Ooops, they got suspended last night. Anybody who bought those deserved the beat down they got.
              You are so right about Pendy…Lacky IS the perfect word… He worked so hard kissing the paid site subscriber writers butts until one let him in. He gets paid more click money being under their wallet busting umbrella.

              1. Grid–I have noticed that BT makes very few comments–but Pen is there to defend him.

                1. LOL, Tim…Neither one of them hung around BTs Bluerock Reit reco.
                  article 2 days ago. What a ham handed mail it in beat the deadline article…Spent all sorts of time discussing the external management when it went internal managed over a year ago. Even I knew that as I played in the A preferred before. He didnt even know it was a monthly payer either…Total embarrassment of an article. BT abandoned it quickly after one response. He is just wanting it buried behind the paywall now.

          2. Grid, you will be amused over the fact that Rida bought more CBL-D a couple of days ago. Like a dog with a bone on that big time ‘dog.’ He can’t seem to let go and move on.

            1. Amy, He was buying that crap way higher. Then when it bounces he will disingenuously brag about the gain, totally ignoring the ass whipping he takes on previous purchases of same issue. I have seen it before from him. He is a total loser in my book. And when a pick tanks (which is often) he runs and hides under mommys skirt abandoning it. Will not man up to take the arrows. I dont get how one person would pay for his weak knowledge picks.

              1. I use SA for ideas mostly.. even my most valued contributors have disappointed this year ( which has been a tough but some chased real garbage imo after my dd).. then I do the hard “Bea” review which includes fundies and technical.. I “follow” very few.. actually follow more commenters! that is the best stuff imo..

                the lackeys have partnered up too..when you read the profiles it amazes me the partnerships.. I have muted Brad Thomas, wish they gave us more mutes..good contributors have left the building.. oh well, it’s free for me as I don’t pay … paying for a subscription to access stale info blows my mind

                1. Hey Bea, do you know how to get behind the paywall to see past articles? Its easy to do, lol…
                  Bea, you are right, some of those commenters are pretty sharp cookies. Plus dont be afraid to help the new people who are naive and read thinking these people know something. One negative post could save someone a lot of money. There are “experts” using “load up” “table pounder” and “back up the truck” and naive people can get hurt not understanding that or proper allocation amounts either.

                  1. GridBird, I know you value Preferred Stock Trader opinion. I do too. He seems to be a credible contributor so I was surprised to see him join Rida’s service.

                    1. Jay, dont let that bother you or reflect on PST. Rida’s customers need somebody with a brain since they are paying for something. Besides, PST is doing this for altruistic reasons. He gets paid more and it all goes to his charity he has.
                      He cant control market ups and downs but he knows what he is doing and, like Tim, is a reputable guy.

                    2. Rick, I like AT, also…He hunts more for imbalances between preferreds and inefficiencies, but he keeps people abreast of various issues and is a straight shooter.

                2. SA stopped being useful at least 2-3 years ago. Anyone still reading and commenting there really ought to question if there isn’t a better way to use their time.

    2. I was and still technically am a stupid subscriber to Rida Morwa’s so called PRO Service (Dis-Service). Rida and his gang issued a SELL on the issue you hold. His buddy Richard Lejeune was the one who gambles with this awful eRIET and then eREIT just because it hustled some new money a few months back. Many of Rida’s subscribers follow him like sheep. When he says, drink the Koolie, they may also follow. For example, he says BUY CBL common or preferreds. If you look at the market, CBL and CBL-D all gapped up. His published collaborators are:
      Rida Morwa, Philip Mause, Jussi Askola & PendragonY
      There is another person I forgot his/her name was a highschool teacher and then has a CPA occasionally also will post something RISKY. I bought and sold with a Net LOSS without waiting for dividend of 20%. Just a few minutes ago, when I saw what he is doing to people, I sent him an email requesting termination or cancellation of my subscription since Xmas 2017. I would rather the risk of perpetual ownership of preferreds and double digit inflation than follow this very popular PRO Dis-service. The other one is Dane Bowler. Dane quit writing because most of his buys are BAD, His brother still pens some. All these writers give articles on SHEER EBITDA and trust every word the management says in Earnings CALL.

      1. Congrats John, you broke free! Sorry he hurt you in the wallet. Richard is fun to read but you are better off going to the roulette wheel at a casino than his dumpster dives…Jussy is just not very smart in my opinion, and tried to keep hiding his losses on CBL acting like each continued recos was unrelated. I kept poking the pig in the eye until he finally would admit it. Pendy…well Tim said it best…A Lacky..I like that…And I like how you write too, John!

        1. Grid, thanks. I thought I should quit these shysters so that I can share my pains hopefully discouraging the readers of Tim’s great website from ever even thinking of subscribing to Rida Morwa and Company. His entry and exit points are just like you said, Roulette. You are correct that Jussi’s picks AND his insistence on his failed positions like CBL will come back roaring with huge profits makes himself loosing all the credibility. I still hold onto AWP, the closed end international eREITS fund. When other members ask them the falling knives even before this extreme sharp market downturn, they will say, it is just temporary, showing some weakness in Europe. It will come back. STRONG BUY! 10% monthly dividend, a simple 1 year chart shows almost a straight line DOWN. I subscribed because their Fake stats were tempting and their claim of covering all the area of investments other than preferreds at that time, hoping to diversify away from my over 70% in preferreds. I am back in 70% preferreds and hope the dividends or interests continue regardless of the market valuation. So far the music stops on Maiden at least for now. Rida’s ARCC and PEGI (hopefully) are the only two decent picks IMHO. I finally quit following them after 2 or 3 buy and sell within 2 months losing good money.
          Richard is a daredevil. I can’t blame him for urging me to sell Navio Maritime at the worst possible time. Without Norm Roberts gun-ho efforts to lobby SA readers not to give up, “the fat lady would have sung.” as called by Richard Lejuene. Then his other 2 crazy ideas including Wheeler which I lost money VERY QUICKLY plus TOO-E convinced me that he truly loves risks. On the current AMID, which I still hold, he claimed that he bought with his own money @ $6. Incredible, isn’t it? Yep, I still hold my AMID getting 3% dividend.

          1. John, I know you have experienced this more than me. But from their public articles they do an extreme disservice to readers by not clearly clarifying the risk. They gloss over and minimize it. And they just may not be very smart and understand it. They stumble onto “cash flow” thinking that is some elixir that supports the double digit yield and it wont get cut…That is just so dumb. Cash flow dont mean anything without the other variables that need to be accounted for. That is like looking outside the window seeing its bright and sunny and determing it has to be 70 degrees outside….Dumb… They appear to pick a high yield, then go parrot management numbers and info to support the random yield of the day…Management is ALWAYS to be viewed as the enemy. When do they ever say, we suck, we blew it, we overleveraged, we overpaid for assets, we deserve to be fired, etc.etc…It never happens! And the writing buffoons always fall for the …”We are not going to cut the dividend” ruse…
            Then they recommend 2X leveraged MLP notes and treat it like a gift from God himself. Investing in those things as suitable investment for income seekers is insanity!
            John the bottom line is those guys are not any smarter than us, and probably considerably worse investors…What they are better at is distorting their performance and collecting subscriber fees. I cant stand how much these types have hurt people in the wallet!

  3. Question for the group: If looking at an issue like NCZ-A, why does Fitch rate it so highly? I’ve scanned the IPO which indicates it can and will invest in below IG issues. Per the August 2018 Semi-Annual Report, only 7.6% of the fund holdings are rated BBB or better. Almost 40% is B or lower. Total Investments are $914.6M. Liabilities (including ARPS and Preferred) are $344.7. So the leverage appears to be 37.6% and the coverage ratio 265%. Is it simply rated so highly because of the low leverage ratio? That despite the low-quality, that literally 62.4% of the fund value would have to evaporate before the senior securities were affected? Also, what is a good resource for finding instant/current Total Investments value which I found elusive. Is NAV*shares outstanding plus liabilities a good substitute to obtain that figure? Thank you!

    1. Read the article published here yesterday “Reviewing Leverage Rules of CEFs”. NCZ-A and NCV-A are issued (a couple weeks apart, for some reason) by AllianzGI Convertible & Income CEF. You have no need to care what the CEF is doing, the 1940 Act protects you as an owner of the preferred.

      1. Larry, if this was the only reason for the high rating, it seems like all CEF preferreds would get a AAA rating. There must be some other reason the AllianzGI preferreds are rated that high….higher than KYN-F for example.

      2. Thank you Larry – Did read and value that excellent article by Tim. Given the underlying securities, the NCZ-A ultra rating is a tad confusing. The 37% low leverage is a very strong positive, maybe all of the positive. Though given the S&P Ratings of some of the underlying securities, some NAV losses over time appear a given. As Alan points out below, the 1940 Act does not provide the same rating on all CEFs – for example OXLCO. So why is NCZ-A so high?

        1. There are additional structural protections that go beyond the 1940 act with NCZ.

          There are weekly tests to see if the fund meets Fitch guidelines/criteria. If it fails the test the fund is forced to either deleverage or rebalance the portfolio towards higher rated investments

  4. Tim, just curious, in your 10 years of model portfolio’s, is the -4.61 the worst you have ever had? Did you experience losses in other years?

  5. As of close today down -3.2% on my portfolio ( a week or so ago it was -0.9%). Rough week or so. Mine is a mix of mostly lower rated IG and non-IG ( but credit bureau rated except for ECCA).

  6. With the benefit of hindsight, I would have loaded up on Microsoft and Amazon when they went public, and retired.

    Here’s what I don’t quite get with hindsight. If I told you that 10 year treasury yields would fall from 3.2% in October to 2.8% in December, would you think that yields on perpetual preferreds would rise or fall?

    1. Yes Roger–agree. No I would not (have not) predicted the most recent fall in treasury yields.

      1. What s funny is that this is so irrational. I m hoping it s fear and that it will normalize a bit after the new year. Then like Tim has said rallies will be sold for a bit until we stabilize. With these interest rates, even projecting the fed to 3% next year, 6% BBB preferreds do not make sense so I m hoping it s market irrationality. I really don t think interest will get that high.

  7. The benefit of hindsight, Tim. I don’t think you were wrong in adding some perpertuals to diversify. If any of us knew this smackdown was coming, we all would have made some moves a lot earlier.

    Like gas, this too shall pass… as you know…

    I’ve been nibbling on the things that are NOT dropping much, if at all… C-L, NISOP, JPM-B, and adding to some presenting good values such as ALLY-A, KYN-F, and LANDP.

    While my paper losses mount, my income is up over 23% YOY. This gives me fuel to ride out the storm as it’s always darkest before the dawn.

    1. Hi Affinity4Investing–I am always best with ‘hindsight’–we all are. I am looking forward to that dawn.

    2. A4I, I have to agree.Which exception of brief 30 minute violent price movements and subsequent recoveries I have exploited, there really is no value out there for me in what I am willing to buy. But what I have is great, so that is fine holding them too. It isnt in my nature to chase distressed high yield. Just not something I am suited for.

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