Our Suite Of Income Portfolios

Our suite of income portfolios is designed with three pillars in mind : yield, risk control and total return. On the service we host three different portfolios with different yield-target ranges:

  • Defensive Income Portfolio (4-5% target yield range)
  • Core Income Portfolio (5-7% target yield range)
  • High Income Portfolio (7-10% target yield range)

Our Approach to Portfolio Construction

The portfolios utilize the full spectrum of risk / reward on offer across different types of income vehicles from open-end funds like ETFs and mutual funds, to senior securities like preferred stocks and baby bonds, to unleveraged, term and perpetual CEFs and to common equities. Different investment options are evaluated with an eye to their resilience as well as offered yield per unit of risk.

Our portfolios are focused on assets that generate actual income rather than assets that merely boast high distributions. This may seem like a small point but it’s an essential element of these portfolios. The advantage of this aspect of portfolio design is two-fold. It provides a clearer picture of the sustainable income generating capacity of the portfolio. And it makes the portfolio more resilient since funds that overdistribute are more likely to cut their distributions and lead to permanent principal and income loss.

We follow an anti-cyclical approach to investing. This involves dialing back risk somewhat during a late-stage cycle environment – when valuations are rich and yields are low. Because markets tend to mean revert this tends to boost both total return and subsequent income levels because of the ability of portfolios to maintain value and enable a reallocation into higher-yielding assets during periods of drawdowns.

The portfolios are designed with an eye toward risk mitigation with allocations to open-end funds, term CEFs and low-leverage CEFs, securities with strong risk-adjusted yields, funds that utilize more robust leverage mechanisms, securities that have proven to respond to drawdowns in a more robust fashion and others. Dry powder allocations tend to avoid perpetual CEFs.

Our portfolios tilt to assets that are likely to maintain their income levels through the cycle. This is implemented by a significant weight to senior securities like preferred stocks and baby bonds that have fixed coupons. CEF allocations are made with a nod to funds with a strong forward distribution coverage profile.

CEF portfolio allocations take into account which sectors have historically outperformed open-end funds and which have not. Some CEF sectors, in particular equity-linked sectors, are consistent underperformers of sector ETF benchmarks despite boasting leverage. CEFs are also managed with a view to avoid value traps.

All of the portfolios, to a varying extent, follow a barbell approach with pockets of relatively defensive assets alongside high-yield assets. This allows for both diversification and rebalancing and acts as an additional source of return for the portfolios.

The portfolios are maintained with an awareness of hidden return drags across certain sectors such as loan refinancing, default rates, negative yield-to-call securities and others.

Portfolios aim for diversification across various risk factors such as cyclical vs. defensive, floating-rate vs. fixed-rate, and others.

Allocations to passive vs. active investment vehicles are carefully considered in light of historic alpha generation capacity of active positions in a given sector alongside typically higher active fees.

The portfolios tilt away from more fragile investment vehicles such as CLO equity CEFs, CEFs with strict leverage caps, highly-volatile sectors managed in CEFs as well as highly cyclical and vulnerable common stock of mortgage REITs, REITs and BDCs. Exposure in these sectors tends to be owned via preferred stocks.

The portfolios aim to reduce the potential for permanent capital loss and income loss by matching sectors with appropriate investment vehicles and generally avoiding combinations that have time-and-again proved to be inappropriate for long-term income generation such as MLP CEFs, CLO equity CEFs, mREIT common stocks etc. Where possible, more resilient securities are used such as preferred stocks in these sectors.

The portfolios tilt away from CEFs with more fragile leverage structures such as funds with hard leverage caps or funds that rely on less sticky mechanisms such as tender option bonds. Open-end funds that use leverage are also used, where possible, as a way to avoid CEFs trading at a premium as well as to improve the risk profile of the portfolios.

The portfolios take a forward rather than backward-looking perspective on income generating capacity of CEFs by anticipating changes in leverage costs and earnings levels.

Portfolio allocations are made with both a top-down sector approach as well as qualitative and quantitative bottom-up fund and security analysis.

In addition to income and rebalancing opportunities, the portfolios are managed with an eye to other rich sources of alpha, available particularly in the CEF market.

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