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Yield Hunting Newsletter | March 2019 Commentary And Sheets

Summary

  • Markets continue their V-shaped recovery in February though the rate of changed has slowed.

  • We are not just 4-5% from all-time highs again as trade and Fed fears have subsided significantly.

  • As the VIX has fallen, closed-end fund discounts continue to tighten back towards long-term averages.

  • BUY ALERT - Putnam Premier Trust (PPT).

Typically the monthly newsletter is used to focus on economic views, portfolio construction, and retirement strategy. The weekly commentaries (out each Sunday evening) are more specifically directed towards closed-end funds and individual security opportunities. To all our new members, you have joined at an exceptionally good time. For existing members, we believe the first half of 2019 will be significantly better than the back half of 2018.


Yield Hunting: Alt Inc Opps

byAlpha Gen Capital

LatestGetting StartedTools

Yield Hunting Newsletter | March 2019 Commentary And Sheets

Mar. 1, 2019 11:17 AM ET•AIFBGTEFRETWFRAHTYHYIIHTAIVHJRIMAVMCIMHIPCNPDIPONAXPPTPTIAXTSLFYYY6 Comments

Summary

Markets continue their V-shaped recovery in February though the rate of changed has slowed.

We are not just 4-5% from all-time highs again as trade and Fed fears have subsided significantly.

As the VIX has fallen, closed-end fund discounts continue to tighten back towards long-term averages.

BUY ALERT - Putnam Premier Trust (PPT).

Typically the monthly newsletter is used to focus on economic views, portfolio construction, and retirement strategy. The weekly commentaries (out each Sunday evening) are more specifically directed towards closed-end funds and individual security opportunities. To all our new members, you have joined at an exceptionally good time. For existing members, we believe the first half of 2019 will be significantly better than the back half of 2018.

"What are two of the most important things an investor needs to do to succeed?  Manage risk and understand where we are in the market cycle."

                      - Howard Marks

Is The Outlook Too Negative?

February was a nice continuation of January with the markets now close to recovering what it lost in the fourth quarter of 2018 now that the Fed has paused both its rate hiking and its balance sheet roll-off.  While the rate of rebound has been slowing, we have seen little to discourage the trend.  The sentiment, conversely, has been decidedly negative.  

Take well-known investment guru Jeffrey Gundlach who had a substantially bearish webcast a few weeks ago.  The presentation centered primarily on the long-term fiscal outlook of this country's finances.  He also used the talk to discuss the V-shape recovery in the markets that started the day after Christmas- the Santa Claus rally being the more prevalent and still ongoing- in many years.  His comments included notes on high yield and floating rate saying the recovery was a great opportunity to get out near whole.  

One of our main tenants as a subscription newsletter service is in managing risk.  We continuously see other services (both inside and outside of Seeking Alpha) essentially play the sentiment and confirmation bias game.  That is, if they are a bull, they are REALLY bulls and simply recommend high-beta stocks to 'beat the market' on the way up.  On the other side, we see the dour pessimists who see a perpetual bear market for years to come.  Both of these types of services play on existing subscribers biases.  In other words, the bullish investor is going to gravitate to the bullish service and the already pessimistic investor to the bearish service.  

This is no different than cable news which uses the same biases to garner viewers.  Fox News tends to skew conservative and show content that would confirm their viewers' opinions while MSNBC and CNN do the same for their more liberal audiences.

Our goal is to navigate the markets for whatever the future may bring- which is completely unknowable.  We do know that we are later in the cycle, which gets us back to the Marks quote which started off this letter.  In his book, "Mastering The Market Cycle", he notes that the best investors are the one's who are unemotional.  

"Most of the errors in our business are errors of emotion. Certainly, the consensus swings far too radically. We can do much better, but the starting point has to be that our emotions are under better control than those of the crowd."

The last six months has been a clinic on investing and emotions.  Sometimes I think all investors are like me and can put aside the market gyrations and continue to look long-term.  Herd mentality and bear-market psychosis can have a devastating effect on portfolio.  We've see that on the marketplace chat these effects play out with anger and frustration in December turning to elation by mid-January.

One thing we noted last week and would reiterate again is beware of herd mentality.  Reading what others are doing can influence your own behavior and shift your risk goalposts.  Many investors/members have been selling appreciated positions to raise cash.  Some have noted that their cash levels have reached 20%, 30%, and even 40%. 

"To outperform others, which is the goal in our business, you have to do something different, and I think the main difference comes in refusing to be part of the emotional swings," Marks said. "Those of us who are able to resist, it's not because we don't feel those influences. It's because we resist. You have to resist if you are going to outperform."

We would encourage investors to stick to your plan!  If you don't have a plan, GET ONE!  If you need help in this regard, email us!  

The initial setup of a portfolio like this can be a bit labor-intensive but once completed, takes far less "work" than most dividend stock portfolios that we see.  We do believe this is the future of investing and that closed-end bond funds could experience a sudden boom in the next decade because of it.  

We thank you for being a member.  

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Here is the link for the new portfolio list:

March Google Sheet

Introduction

We are continuously revamping and trying to improve our service given the amount of information we provide along with the complexity of it. In the next couple of months, we want to introduce a procedure for implementing the "system" in a straightforward manner.

Most financial advisors do a significant amount of work on the front-end even if their 'systems' are cookie-cutter for all clients. This is what most do-it-yourself investors lack. They lack the plan and the structure preferring to lop together a bunch of stocks, bond funds, and cash into an allocation.

Please note that the Google Sheet is new this month as it is every month. There is a date at the top in the title of the sheet as well as the date in the spreadsheet itself. On the first of each month, we create a new sheet and link. Please bookmark it or access if via the "tools" drop down in the service.

New members should start with the "Welcome to Yield Hunting! Alternative Income Opportunities" and should read our primer titled: "Yield Hunting | How to Get Started- A Primer on DIY Income" under the "Getting Started" menu drop down.

On the Google Sheet, we now have an "Instructions" tab as a quick guide for more novice investors.

Please visit our new website at YieldHunting.com. It has all of our public articles and retirement articles.

Lastly, we now have 85 reviews on our service with nearly all being five-star. If you haven't left a review, we would very much appreciate you doing so. Click the link below which should allow you to write feedback.

We are going to start to separate out the newsletter and manage three real time portfolios: Core, Mini Core, and Flexible. Look for more direction on managing these along with more ideas centered around swapping and deep value. The general objective is to be buy and hold while also taking better advantage of opportunities in specific sectors- avoiding losses in others.

Yield Hunting: Alt Inc Opps - Marketplace Reviews

A Look At How Behaviors Affect Investing

Wealth, this idea of your relationship with money, is really rooted more in a set of behaviors than it is in a particular destination.”

The past six months could be a case study in the behaviors of retail investors and the mistakes many can make.  Over the summer 2018, we had a rising market which lifted nearly all boats- benefiting shareholders significantly.  That changed swiftly as the fourth quarter began.  As it progressed, we saw nearly ALL asset classes fall, and fall significantly, scaring investors in the magnitude.  

By December, investors had clearly gone from agitated to downright angry and scared.  This is not uncommon.  But perhaps investors can be 'taught' to not respond so rashly.  We have long been posting pieces to stay calm during significant negative market events.  This is both part financial literacy and part behavioral coaching.  

The cost of a financial advisor, in my opinion, is more so in the stoppage of certain behavioral reactions rather than the security selection or perhaps even financial planning.  The fact is that financial literacy can only be partially mitigated.  Even if you read everything that the publications you subscribe to on a daily basis- Seeking Alpha, Wall Street Journal, Barron's, etc- if your true profession is outside of the financial field, you are unlikely to have enough time to fully learn and understand it.  That is not to say you couldn't.  Anyone can.  It is more the timing involved and the inclination or desire. 

Financial advisors spend a lot of time trying to educate their clients.  But the studies show that the time spent on financial literacy only showed a small positive effect on financial habits.  Extraneous factors had results that were similar, and more often greater to, financial education.  To put another way, someone who is financially intelligent but cannot contain emotions and is highly impulsive may exhibit as bad, or worse, habits compared to the financially illiterate showing that knowledge on its own is not enough.  

Additionally, people who are considered smart in certain fields - doctors, lawyers, software engineers, to name a few- often believe that if they can excel in those fields, they can excel in any field.  This is often a dangerous cocktail of arrogance and financial illiteracy.  

Overcoming behavioral issues is something that can take years to tackle.  In its most simplest form, simply being able to buy when others are selling is one of the most fundamental behavioral traits that must be mastered.  And yet, most retail investors have trouble following this most basic rule.  Why?

Investment assets are hard earned money that the investor has spent years accumulating.  It would effect nearly everyone to see it take a 20%-30% hit in less than 3 months, like we saw in the fourth quarter of 2018.  

What Investors Do Wrong Most

  1. Chasing Investment Returns:  Most investors screen funds, stocks, etc based on the aspect that is most satisfying to them, returns.  But returns in and of themselves tell us virtually nothing about the prospect of future returns.  We also see herd mentality with the shiny object being the next hot stock or sector, or even fund.  The greater fool theory is the one where people pile in and push up prices until the whole house of cards collapses.                                                                   

  2. Selecting Investments That Are Far Out Of Their Wheel-House:  The growth of the investment universe in the last two decades is nothing short of astounding.  Add in the amount of financial information that is available to us on a second by second basis and it is very hard to not let the herd effect your thinking.  Thus, we tend to get swayed by those shiny objects and go with our emotions over logic.  This is why we've used the JP Morgan quote several times over the last year:  "Nothing so undermines your judgement as the sight of your neighbor getting rich.”                                             

  3. Selling During Times Of Market Stress:  This is probably the premier "emotions-based reaction" investors make.  At the first sign of trouble, they pull the trigger and sell everything and anything.  Investors that invariably sell when the markets get volatile are just the types of investors who are likely taking too much risk and/or not conforming to points one and two above.  This is why we espouse a portfolio whereby you can take enough risk to reach your goals, but the least amount to achieve them so as to not make this mistake.  LDI investing can create a better sense of security letting you ride the volatility but avoid selling low.  

What are somethings you can do to avoid these common mistakes?

  • Learn, learn, learn....  You don't need to be in the financial industry to be an expert.  If you make it one of your hobbies to read and learn about the financial industry, over time, you will get it.  Spending a few hours a week on learning, asking questions, and research can make you a better investor than the vast majority of retail investors out there (and even a lot of financial advisors).  Just beware:  sometimes being well informed by reading the WSJ or watching CNBC all day can give the illusion of knowledge.

  • Get Help!  And this doesn't need to be from a financial advisor either.  This service is meant to give DIY investors a little nudge in the right direction to fill some gaps in knowledge.  And we are in a unique and niche space of closed-end funds combined with financial planning.  As we noted above, a little guidance and a little emotional support during difficult times can be well worth the costs in many cases.  

  • Keep it simple!  There is no need to venture into the overly complex and risk scaring yourself.  Some of the portfolios I see from Morgan Stanley, Presidential Brokerage, UBS, and others are just downright crazy.  They typically provide little or no value and in the end, just provide the illusion of doing something unique and specialized to justify the fees.  

Holistic Investing

We believe the future of the asset management space is quickly heading towards holistic investing.  We recently penned a piece on LDI (or liability-driven investing) where you match your spending to income production in the portfolio to prevent the investor from ever having to sell a share of anything.  We believe this will be the future of wealth management for many in the lower mass affluent space ($1M-$5M in total liquid assets).  

Traditional financial planning was such that you took your pile of assets, you invested it into an asset allocation, and then you withdrew 4-5% each year adjusted for inflation (4% Rule).  The markets did the rest for you as equities boomed for most of the last three decades and even high quality, low duration bonds netted you 6%.  In that environment, it is very easy for your plan to work.  

We think we are moving towards a holistic, total-wealth approach where other tools that have normally been shunned are needed.  Tools like annuities, whole life insurance policies, and other more esoteric securities like closed-end funds are popular anew.  This is a change from the old paradigm of dividend paying stocks and some bond funds.  Most investors are not schooled in many of these areas and this is why we think the holistic planning age is upon us now. 

Portfolio Construction

We want to reiterate how we plan and execute on those plans for members and clients alike.  That is, map out your next few years of spending and aligning the portfolio for your true level of risk.  

Below is an illustration for a real managed portfolio.  This is just an illustration and should not be used as investment advice or copied without assessing your own risk tolerances and objectives.  

The client is a family member, 69 years old.  They spend approximately 5.7% per month of portfolio value which is aggressive.  Health issues are prevalent and the client believes life expectancy to be slightly below average.  

I think this will be a good walk-through of both building a portfolio like this from scratch and the specific building blocks. 

One of the most repeated feedback items is on the amount of trading.  We often hear something to the tune of "too much trading" or "too much getting in and out of positions."  We looked at this account's trading activity which has both a Core Income Portfolio and a Flexible Income Portfolio component, in addition to preferreds and open-end mutual funds.  In the last six months, we have conducted just 5 trades related to the Core (less than one per month) and 8 trades related to the Flex portfolio (since starting in November).  We also made a few initial buys into preferreds (that will be held for a long time period) as well as the open-end funds.  We foresee trading in 2019 to be less than 20 times in aggregate (that is round trips, or buys and sells).  

Once established, you could simply let the Core ride and not make the small tweaks and rotational trades that we do each month.  Most of those trades make small tilts in the portfolio moving more towards the funds that are cheaper and we think are showing better NAV trends.  A member could ignore those and simply hold the Core- perhaps making one or two of the major changes each quarter or even year.  

For the new members (especially in the last month) establishing positions today may be much more difficult.  Looking at the Google Sheets today shows more 'red' than 'green' meaning more 'sells' than 'buys'.  We would be extremely patient in starting out today and move in slowly.  

If you are very conservative and not needing the higher income production right away, then I would recommend waiting for the buy flags to flip on the Core before purchasing.  If income production is paramount, creating at least footer positions in the 'hold' rated may be prudent along with immediately acquiring the 'buy' rated positions.  

We have done some performance attribution on 2018 and will be releasing that shortly when completed.  Basically, we outperformed the S&P 500 by nearly 250 bps while our annualized volatility on price was more than 40% below that of the index.  On NAV, the risk metrics were even more impressive.  The NAV volatility of the Core was almost 80% below that of the S&P 500 in the last year.  At the same time we outperformed (again, over the last year).  

When we had the discussion of safety on the chat, this is to what we are referring.  Now, some of that is a bit illusory as it tends to occur during periods of a rising market- but volatility and downside risk can increase correlations during jumpy periods (like the fourth quarter).  

Now, let's get back to our example.  

The portfolio totaled $1.184M as of February 24th.  The total portfolio produces $67K in income or about $5K per month.  This is very close to the annual withdrawal rate. 

A side note:  This withdrawal rate is far too high, especially for a risk averse or conservative investor.  However, the investor has a fully paid off home worth approximately $900K plus a likely short life expectancy.  

The 'safe bucket' yields 2.9% and generates $3,322.  More importantly, most of it is in pure cash, cash plus, or a Bulletshare ETF that matures at the end of next year.  This will supplement the income production generated by the portfolio that is sent out on a monthly basis.  Sometime probably in the second half of next year, we will be pooling or selling some shares of a security we believe to be the most expensive in order to purchase the BulletShares Corporate Bond 2020 ETF.  The base percentage for the safe bucket is 10% or about 22 months of income need.  

The Core Portfolio is about 24% of the total liquid assets ("TLA").  This is well below our stated MAXIMUM (read not recommended) rate of 35% in leveraged products.  More on this in a moment.  The $284K across 12 positions (the accounts are almost all qualified monies so munis didn't make sense for them) produce nearly $2K per month in income.  

The Core piece had been over 32% just a few weeks ago but we toggled it back some (buy and holders can set it and forget it).  The high withdrawal rate means we need to be careful with volatility and given this portfolio is only 20% equity, the largest source of volatility will be from the Core.  Being cognizant of the income production yield (5.66%) and the withdrawal rate, we took down the Core allocation as much as we could without dropping much below the 5.7%.  Much of that reduction went into the open-end bond funds of PIMCO Income (PONAX)and Performance Trust (PTIAX).  Once we see valuations become cheap again, we will rotate back from the open-ends to some closed-ends and improve the yield.  

Why Do We Do It This Way?

Specifically, we think the next few years could be catastrophic for some portfolios that are withdrawing 4%+ per year.  The reason being that sequence of returns risk could be the most extreme today than it has ever been in history. 

Many investors do no realize that you could earn an average return well in excess of the withdrawal rate but still fall short.  Why?  The starting date matters!  If you retired in 1929, for example, you would be living on the portfolio just as the worst stock market crash in history was about to play out- in addition to one of the worst 30-year returns for a balanced portfolio (+6.2% compound annual growth rate per year).  As a result, even if an initial withdrawal rate of 6%+ more than "works" with long-term average returns, you can still run out of money. 

There is actually little correlation between the 30-year return you generate and the amount of the initial withdrawal rate.  For instance, the historical results show that a 1966 retiree would have just about run out of money with a 4% withdrawal rate even though their 30-year return was almost 9.6%.  Conversely, a 1912 retiree would have realized a 5.50% return but have been able to sustain a 4.6% withdrawal rate.  The key, again, is where those returns fall.  The 1966 retiree would have been retiring at the start of a 17-year bear market while the 1912 wouldn't have realized bad market returns until the  end of their 30-year period.  

The problem as we've defined it many times is that returns are not linear meaning you do not get that 6% total return each and every year.  They are lumpy and as we've noted many times, early losses in your 50s and 60s when you move to distribution mode can derail your retirement.  This is the case even though your 30-year return may be 2% or 3% (or more) than the initial withdrawal rate.  

Academic data shows that taking a 5% withdrawal rate and adjusting it higher for inflation each year runs out of money in nearly 25% of historical scenarios looking out 30-years.  This even though the higher 5.4% initial withdrawal rate appears to work compared to even the worst 30-year period for investment returns in history.  And we think that many couples will have retirement 'careers' that well exceed 30-years as health advances accelerate significantly in the coming decades.  

This is where the origin of the 4% was derived.  By lowering the initial withdrawal rate far enough below even the worst 30-year period for stocks, it made it a safe bet that the portfolio would last through retirement.  To summarize, the sustainability of the portfolio distributions is far more a function of the order in which the returns over the average annual return itself.  

An investment approach like this is not going to be the best long-term compounder.  But it will be a defensive one that should prevent the sequence of returns risk (and subsequent longevity risk) that we are concerned about.  The results show that the average retiree finishes with triple the original portfolio value on top of the distributions.  In only 10% of observations did the retiree end up with less than their original portfolio value using a 4% withdrawal rate.  

The results are skewed to the upside with the bottom 10% of outcomes right around 100% of original portfolio value (after distributions) and the top 10% of outcomes at about 600% of original portfolio value (after distributions).  

If we can position the portfolio to navigate what we think could be a precarious minefield these next 1-5 years, then we can be in a position to avoid that 1966 retiree scenario.  

The Core Portfolio

February saw another strong month with the portfolio rising another 300+ bps for one of the best two-month performances of the last several years.  YTD, the model portfolio is up almost 9%, compared to the market's 11.8% posting.  We have started to see our high concentrations in floating rate and to a lesser extent high yield really start to work.  

YTD, the best performer has been Nuveen Real Assets & Income (JRI) which is up ~16.5% with Ivy High Income Opps (IVH) up the second most at +14.25%.  To be fair, these were the worst performers in the portfolio in 2018.  All holdings in the portfolio are up YTD with numbers ranging from +3.5% to +16.5%.  

At this point, most of the Core positions are close to or at new highs.  Those highs were hit in late September when the market peaked on September 26th.

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Some positions are close to, or even above their September 26th highs.  

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Below is the model as of midday February 28th.  The weights are slightly different than the target weights offered up on the Google Sheets as it is an active model.

In general, the growth in the portfolio was broad based with the weakest position being PIMCO Dynamic Income (PDI), at just +15 bps.  Pioneer Municipal High Income (MHI), a position we sold a few weeks ago, was also a weak performer.  The best position was also a fund we sold a month ago, Barings Corporate Investors (MCI).  

We aren't making any changes this month to the core portions weights as the few buy-rated funds are 'near the top' meaning the heaviest weighted while the sells are nearer to the bottom.  

Trade Summary

Core Summary:

  • PPT from zero to 4%

  • No changes to existing positions

Mini Core Summary:

  • Replaced MHI with PPT

Rationale:

MHI was sold in the last muni update.  

We are adding a new fund to the Core list.  

Trade Alert:  Putnam Premier Income (PPT)

This fund has all the aspects we look for when deciding to add a position to the Core Portfolio.  

  • Attractive discount

  • Compelling yield

  • Strong fundamentals and trends

The fund currently trades at a 7.26% discount which is about 80 bps below the one-year average but approximately 5 points below the 52-week high.  It pays a nice "PIMCO like" 8.43% yield which is their effort to wind down the large amount UNII.

The thesis is not a long-term one but it is longer than a convergence trade or a flex trade opportunity.  That yield for what is held in the portfolio (more than half being investment grade high quality paper) is an anomaly.  They announced a capital return program late last year (similar to what JCS and Nuveen did recently).  This is some verbiage from the announcement:

The Trustees of the Putnam Funds have approved an amendment to the dividend policy for the Putnam closed-end funds to establish targeted distribution rates for common shares. Under the policy, each fund currently expects to make monthly distributions to common shareholders at a distribution rate per share as follows:  

It is currently expected that a fund’s ordinary income will be the principal source of its distributions. However, the balance of the distributions, if any, will come first from any capital gain and then will constitute a return of capital (ROC). A return of capital is not taxable; rather it reduces a shareholder’s tax basis in his or her shares of the fund. A return of capital will further reduce a fund’s net asset value and thus, over time, potentially increase the fund’s expense ratio. The funds expect to make ROCs in order to achieve the targeted distribution rates. Distribution rates are not performance. Because the distribution rate may include a ROC, it should not be confused with yield or income.

Credit Quality:

Maturity breakdown:

Other Characteristics:

  • Average effective maturity:  7.4 years

  • Average effective duration:  1.48 years

  • Leverage:  19.1% (portfolio leverage through derivatives)

Concluding Thoughts

The fund is a unique play in the higher quality space.  That play is to grab a 7.26% discounted fund paying 8.43% until ROC comes in with significance into the distribution.  Sister fund PIM is already showing some ROC so we favor PPT over it.  The fund goes ex- on the 21st of each month and the discount typically widens between 4 and 8 days following.  So far, we have only seen about 16 bps of widening this month.  

We will be establishing a position using limit orders in the high $4.90s for an initial 4% in the Core.  Our buy under/ sell over thresholds will be set at -7% and -3%.  

This is a similar play as JQC which recently instituted a similar program but on steroids.  However, PPT has the benefit of being a much higher quality (in terms of underlying holdings) fund.  The holdings being mostly (~60%) investment grade and some exposure to high yield and EM bonds.  It's really a multisector go -anywhere fund that fits in well in the Core.  

Top "Quality" Funds

(1)  THL Credit Senior Loan Fund (TSLF):  This is a fund we own in the Core and have been nibbling more lately.  We are likely to go above the target weight if the fund continues to sell off.  It is early yet but it appears the price is falling back at the same time the NAV is starting to inflect higher.  The fund recently raised its distribution and is going to release new financials very soon.  

(2) EV Senior Floating Rate (EFR):  This is a lower yielding floating rate fund that is significantly out-earning their distribution.  The same thesis holds for sister funds EFT and EFL.  All three funds have coverage of 110%-112% with nice UNII buckets of about ~10 cents.  The discount of EFR is 11.6%, which is 330 bps below the one-year average and nearly 900 bps from the one-year high.  We think it is suffering from a yield look from investors who fail to look at the total return potential.  

(3) Apollo Tactical Income (AIF):***We didn't have a good third pick and since AIF hasn't moved in excess of the market, we'll put it back in for this month again.

This 8.95% yielding fund is currently earning 104% of the distribution, has positive UNII of 9 cents, and has both of those trending higher for a trifecta of what to look for. Again, the fund deals in lower quality debt of mostly health care and financial services companies. The discount is near 13% compared to a one-year average of 11.3% and longer-term average near 10%. The fund is levered by 33% and does have relatively high expenses, which can account for some of the discount.

Top Convergence Trade Opportunities

These are funds that have solid total return opportunities that could be realized shorter-term.

(1) JH Tax Advantaged Global (HTY): This is a global div fund that cut the distribution about six months ago (it's a quarterly payer) from $0.22 to $0.16. The discount subsequently blew out and went from a premium of 15% to a discount of nearly 9%. The fund is made up primarily of large world stocks (98 holdings) of names most people have heard of. The fund was paying around 9% in yield but it OBVIOUSLY wasn't producing that from dividends or any overlay strategy. So a cut to the distribution clearly came because the NAV fell when global stocks hit the skids in the fourth quarter. With stocks recovering, there's a chance they could raise it again. If they do so, look for the discount to close.

(2)  EV Tax-Managed Global Buy-Write Opps (ETW):  A member recently asked us about this fund and we think it could be time for another look here.  The price has fallen back more and the NAV is moving up at a decent rate.  They announced a cut to the distribution back in December which reduced the payout by 20%.  The price has come down by approximately 16% since August so we think it is pricing in most of that cut.  As the rest of the CEF space has 'zoomed' in the last two months, distributions have come down all around.  The 9% distribution yield now looks attractive.  

(3) Highland Floating Rate Opp (HRFO): This was in our top funds list last month and it has moved up nicely (from $12.96 to $13.92, plus a distribution). However, we do think there is some juice left in the move with the discount at 3.5%. Our target is a 1% premium, leaving 4.5 points of juice left to squeeze. The yield on the fund 6.65% through a managed distribution policy. Last month, the z-score reached an abismal -4.10 that is typically indicative of a large distribution cut. But there was none in the case of HFRO. The fund returned over 10% in a month.

Reviewing Top "Quality" Funds From February

Last month, our top quality picks were:

  1. Western Asset High Yield Def Opp (HYI)

  2. Apollo Tactical Income (AIF)

  3. PIMCO Corporate & Income Strategy (PCN)

Both HYI and PCN performed extremely well during the month with AIF doing about similar to the benchmark.  PCN is now fully valued here after what we thought was a brief 'convergence' opportunity.  HYI looks close to fair value as well at a -7.4%, about 340 bps tighter than the one-year average.  Both funds could run further as we typically see these types of trades over-run the average and come much closer to the one-year highs.  AIF has 'lagged' the other two with a more average move.  My theory is that the NAV wasn't moving up like the other funds.  However, it does appear to be moving...

Reviewing Top Convergence Trade Opportunities from February

These are the funds we believed showed the greatest promise for total return opportunity from a tightening discount.

  1. Blackrock Floating Rate Strategy (FRA)

  2. Highland Floating Rate Opp (HRFO)

  3. Blackrock Floating Rate Income (BGT)

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Fun With Charts

1)  So many larger portfolios de-risked near year-end or too soon into the recovery thinking they needed to sell the rallies.  Now they are being pulled back in slowly.  

The market’s rally has also forced investors to rebuild positions they may have sold off during December’s tumble—and they may not be finished just yet. Hedge funds and risk-controlled portfolios still have little exposure to the market relative to history, noted Marko Kolanovic, global head of quantitative and derivatives strategy at JPMorgan, while retail investors have still not put much money back into the market after the downturn. That suggests the current rally could last until May, he wrote. “If volatility stays contained,” Kolanovic explained, “re-risking should continue.”

                           -Barrons

Yield Hunting Newsletter | February 2019 Commentary And Sheets

Yield Hunting Newsletter | February 2019 Commentary And Sheets

Summary

  • We saw one of the sharpest rebounds in the market (all markets) that I can personally ever remember.

  • Discounts on closed-end funds have recovered substantially with the average fund closing in on their 52-week average.

  • Our call on the economy not going into recession seems to be the correct one and the market swoon a Fed-induced bear market.

  • The game plan for the next month is to continue to heal our portfolios and hopefully get back close to new highs, then de-risk some.

  • YH has a bunch of exciting things coming in 2019 so stay tuned!

Yield Hunting Newsletter | January 2019 Commentary And Sheets

Yield Hunting Newsletter | January 2019 Commentary And Sheets
  • Markets experienced the worst December in decades along with the worst overall year since 2008.

  • The market is currently pricing in a significant slowdown and serious credit issues.

  • While the economy is likely to slow, it will still be faster than it was on average from 2009-2016.  Think about that.

  • We think this is a great buying opportunity in the short-term though we do think the cycle is coming to end in roughly a year.

  • Taking advantage of the opportunity, being nimble, and adjusting to what the market gives us will be key in 2019.

Yield Hunting Newsletter | December 2018 Commentary And Sheets

Yield Hunting Newsletter | December 2018 Commentary And Sheets

Summary

  • Markets found some stabilization in November though credit continued to be net overall weak during the month.

  • Credit spreads continued to widen and hit 4.31% during the month, the widest levels in over 3 years.

  • The Core Portfolio returned just under half a percent (+0.48) for the month with modest discount widening and NAV pressure being slightly overwhelmed by distributions.

  • We think we are setup very well for an end of year rally and the "January effect."