Weekly CEF Market Report - May 23, 2021
Weekly CEF Market Report - May 23, 2021
Macro Picture
Stocks weren't much changed this week with the S&P 500 down small and the Nasdaq up marginally. The larger news item was the ~40% drawdown in cryptocurrencies. This is the third of such drawdowns in four years. However, this time it occurred in a $2T asset class. Cross asset class contagion is not yet apparent so it really is just noise right now occurring in a very nascent asset class.
Instead, there's two pivots that will occur this summer. The first is the shift from accommodative Fed to hawkish. That entails tapering and maybe even starting to discuss rate increases. The FOMC meeting this week started to talk about tapering the asset purchases.
The second pivot is when we hit peak growth, peak earnings, peak government stimulus, and peak inflation expectations. When that occurs later this year, will we have a shift away from the cyclicals/values towards defensives/growth? To be determined....
So far this year, commodities is the place to be. Goldman Sachs has been pushing them hard on their clients. Value is next followed by small caps and then European stocks.
We had some very strong soft data come in on Friday with PMIs that showed a very robust economy. The IHS Markit Flash PMI came in at an all-time record of 68.1.
Despite all that, bond yields were largely unchanged on the week. We saw a little rise in yields following the FOMC meeting minutes release but not a whole lot. This implies that the tapering is probably baked into the bond market right now at some point later this year.
Commentary
Discounts tightened back up as we saw a generally strong week for our strategy. Discounts tightened back up towards their 8-year highest levels with NAVs rising as well. The one-day (or three depending on how you look it) mini correction now a distant memory.
The Core Income Portfolio was up 0.51% on the week and is now up just under 10% on the year. At its peak, it was up a little more than 11% a few weeks ago.
Sector Results:
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Our strategy, simply put, is to create a portfolio of fixed income closed-end funds and alternative asset classes (such as REITs, Preferred Stock, and Baby Bonds) to create a risk managed approach to retirement income.
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Core Income Portfolio This is our main model. It has about a dozen securities (almost all CEFs) with almost no equity exposure. The risk profile by NAV is less than half that of the S&P 500. It is a bit more passive than most portfolios, with only a handful of trades a month- making it very easy to follow even for the novice investor.Current yield 8.53%. 2019 return 19.56%
Flexible Income Portfolio: This is our active trading portfolio. It is designed for more aggressive investors looking to maximize capital gains along with yield- looking for funds that have a high probability of mean reversion (extremely large discounts that have a good chance of closing in the short term). Current yield of 7.46% (some tax-free muni income). 2019 return of 23.14%.
Taxable Income Portfolio: This portfolio takes a more tax-advantaged approach, attempting to maximize after tax gains by utilizing funds that keep an eye on tax liability.Current yield of 4.96% (mostly tax-free). Since inception (November 1, 2019) return of 2.96%.
Peripheral Portfolio Database: This is aimed at diversifying the Core Portfolio by investing in equity CEFs and REITs, preferred stocks, exchange-traded baby bonds, ETFs, Mutual Funds, and other securities. It is less a full portfolio than a list of researched funds that we recommend for those that want to expand beyond the conviction list of securities but don't have the time or inclination to do the research themselves. This includes a "Safe Bucket" section detailing the highest yielding cash-plus securties where excess cash can earn upwards of 4%. The model portfolios are designed with real time pricing detailing specific "buy, hold, sell" ratings.
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While our service is aimed primarily at late stage career and retired investors, the strategy can also be used to lower risk by augmenting traditional equity investing via open-end mutual funds or ETFs. This includes those who have spent many hours researching and selecting the equity side of their portfolio, but don't have the knowledge or time to do the same for the fixed income side. We use high quality institutional research to avoid distribution cuts, opportunity risk, and other pitfalls which can derail your strategy.
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1) Alpha Gen Capital - I am a career financial advisor (non-practicing) and investor. Not someone from another career doing this on the side. The AGC team and I use detailed analysis to provide safe and actionable insight without the fluff or risky ideas of most other letters. Our goal is to provide a relatively safer income stream with CEFs and mutual funds. Maybe more importantly, we also help investors learn about investing and how to properly construct a portfolio.
2) George Spritzer - Another career financial guru who runs a registered investment advisor with a specialization in closed-end funds for individuals. George uses the following investment strategies: 1) Opportunistic Closed-end fund investing: Buy CEFs at larger than normal discounts to NAV and sell them when the discounts narrow. 2) Exploit special situations: tender offers, fund terminations, fund activism, rights offerings etc.
3) Landlord Investor- Spent his career as a management consultant for public sector clients at a multinational consulting firm in the DC area. He has transitioned to a new career as a full time landlord. His investment portfolio is comprised of two parts -- broad-based index funds and income plays such as preferred stock, CEFs, and REITs. He also owns individual/baby bonds which he buys on margin to boost total return. Landlord is our 'individual preferred stock' expert analyst.