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Summary Total return (paper profit) lags as high yield and related sectors remain in the market “doghouse”. But cash returns have grown by over 11% since a year ago. Yields and re-investment rates over 10%. Credit still represents a more attractive way to earn “equity returns” than real equity. In other words, it is safer to bet on your horses merely FINISHING the race, rather than their having to win it. As we review our “savvy senior” IRA portfolio partway through the 4th quarter of 2015, the trends mentioned in recent articles ( here and here ) continue unabated. These trends are: 1. Our deliberately income-focused portfolio continues to crank out a steady stream of distributions and dividends, currently yielding 10.9%. We see no economic reason for these highly diversified income streams not to continue indefinitely. 2. With the compounding effect of re-investing our cash dividends at these high rates, we have seen our income stream (the output from the portfolio that we think of as our income “factory”) grow to where it was 11.5% higher for the first 9 months of 2015 than it was for the first nine months of 2014. This growth should also continue, as long as we continue to re-invest income, which the IRA structure encourages. 3. Even though the “factory” is producing 11.5% more current income than it was a year ago, the market has continued to value the asset classes we own – high yielding bonds and loans, high yielding structured vehicles (i.e. collateralized loan obligations), MLPs, BDCs, and closed end funds in general – pretty negatively. 4. This has lowered our total return (cash income plus market appreciation or depreciation) to date in 2015 to a negative (- 2.97%), while also providing us with some terrific re-investment opportunities, with numerous solid, well-managed closed end funds sporting discounts in the teens. Overall Strategy To use a horse race betting analogy, my investment philosophy is like betting on a whole lot of horses to “finish the race” rather than on individual horses to “win the race.” Most of the funds I own are credit or credit-oriented investments rather than investments in equity. When you invest in credit funds you are betting that the companies in the fund will merely stay in business (i.e. pay their bills and not go bankrupt). That’s a pretty low hurdle. Yet by making credit investments via the closed end fund market, you can earn what I consider a pretty steady “equity” return of 9-10%. That is because you start with high-yield companies that pay interest rates on their debt of 5 to 8%. (High yield means non-investment grade, and remember that the great majority of all companies in the US and the world are non-investment grade companies, so we should not let the term “high yield” or even “junk” scare us. High yield debt – bonds and loans – had historically high default rates as one would expect during the recession, but as asset classes they performed well and investors who held on and didn’t sell in a panic made out very well.) You put those in a closed end fund structure where you can often buy at a discount, which adds another 50 or 100 basis points, and then you add in the benefit that CEFs can leverage themselves modestly (less than one-half times) which may add another 200 basis points or so, and you are up to yields in the high single-digits and higher. As I’ve written before, I sleep well with this sort of a strategy. A bet on hundreds or maybe thousands of companies staying in business, paying their bills, or if they are utilities and other types of infrastructure companies, continuing to operate and pay their dividends, seems like a more reasonable and predictable bet than an equity bet, where the company has to not only survive, but grow and increase its dividend over time for the bet to pay off. (Some of my funds are equity funds too, mostly of the high-yielding dividend variety, but the bulk of the portfolio consists of credit-oriented investments.) My approach seems compatible with the current economic situation, where it seems we are on track for steady but hardly spectacular domestic growth, within a weak global economic context, and a volatile domestic and global political context. That suggests that interest rates, when they do rise here in the US, won’t rise by much; and that inflation is pretty well contained as well, given that wages in the US (for ordinary workers, not for CEOs) are held down by the global outsourcing option and the continuing post-recession reluctance of many businesses to add permanent workers. This situation – slow growth in the US, but lots of overall uncertainty – suggests to me that a somewhat predictable 10% return (received in cash and immediately re-investable) from credit risk beats a less predictable higher return from taking equity risk. Some other more traditional equity-oriented, dividend-growth approaches have done better so far this year than my approach from a total return (i.e. paper profits) perspective, but the dividend yield (i.e. money in the pocket) has been far less. Here are some examples: · Vanguard’s Dividend Appreciation ETF (NYSEARCA: VIG ): YTD total return of – 0.76%, with a yield of 2.28% · Vanguard’s High Dividend ETF (NYSEARCA: VYM ): YTD total return of 1.66%, with a yield of 3.1% · ProShares S&P 500 Dividend Aristocrats (NYSEARCA: NOBL ): YTD total return of 0.96%, with a yield of 1.89% · SPDR Dividend ETF (NYSEARCA: SDY ): YTD total return 0.72%, with a yield of 2.44% · Vanguards’ Wellesley Income Fund (MUTF: VWINX ): YTD total Return of 2.52%, with a yield of 2.83% · Vanguard’s Wellington Fund (MUTF: VWELX ): YTD total return of 2.1%, with a yield of 2.58% I have attached my entire portfolio, listing the securities (most of which are closed end funds), their yields and premiums or discounts from NAV, the percentage each represents of the total portfolio income, and the percentage each represented back in April when I last posted the entire list. Readers will see that the previous list only accounts for 85% of the income from the current portfolio, which means 15% of the previous list’s income came from investments since eliminated and replaced. Those investments are listed separately at the bottom. New Positions Added: · Cohen & Steers MLP Fund (NYSE: MIE ), which I bought because it seemed some of the distribution, storage and transportation MLPs were being unfairly tarred with the same brush as the exploration and production MLPs, despite their being in different businesses. The market can’t make up its mind on this and MIE’s price gyrates wildly from day to day. Having sold at over 20 last year it is now in the 12’s, paying a 10% dividend. Seemed like a good opportunity to me. · Babson Capital Partners (NYSE: MPV ) , which is a decades old fund that buys and holds the sort of private placements that insurance companies like the fund’s parent Massachusetts Mutual have been doing successfully for years. I switched into this because it seemed like a nice “hunker down and forget it” sort of investment, paying close to 8%, with an 11% average annual return since 1988. · Cohen & Steer’s Infrastructure Fund (NYSE: UTF ) , which I’ve owned off and on with good results. It seemed that utilities were getting beaten up by the market unduly, so I created a new position in UTF, which I will be adding to in the future as well. Has been up over 22 and now sells under 20 and yields 8%. Cohen & Steers are long-time, experienced managers. (Similar thinking in the increased position in Duff & Phelps Global Utility Fund (NYSE: DPG ) . Yield of 8.5% with a 15% discount to NAV.) · Blackstone Long/Short Credit income Fund (BGX ) is essentially a loan fund. I think the long/short part means they have the authority to short loans and other instruments that they think may default. I opened the position because loans had taken what seems to me an unreasonable beating in the market and yields and discounts had gotten pretty attractive. Currently BGX is discounted 15% and yields 8.3%, which is pretty good for a fund that holds well-secured floating-rate loans (i.e. virtually no interest rate risk). · Nuveen Tax-Advantaged Total Return Strategy Fund (NYSE: JTA ) . I added a small position here when I read Douglas Albo’s valuable piece in mid-summer pointing out the unusual value this seemed to represent. Yields 8.88% and sports an 11.4% discount. Here is Doug’s article for anyone who wishes to read it. Some other changes to my portfolio: · Added to both Oxford Lane Capital (NASDAQ: OXLC ) and Eagle Point Credit (NYSE: ECC ) after attending OXLC’s annual meeting and then also meeting with ECC’s management. I think both funds have been beaten up price-wise unduly by (1) the general drop in high yield assets overall, (2) the fact that in both cases the traded stock as opposed to what is owned by institutions is apparently rather small and therefore the price bounces around a lot based on small volume while most of the stock sits quietly in the portfolios of long-term holders, and (3) the disconnect between reported GAAP earnings and the actual cash flows and taxable earnings from which distributions are paid is a bit too complicated for most investors to understand, despite recent efforts by the managements to try to explain it better. The confusion in the market about the effect of the Dodd-Frank legislation on the ability of new CLOs to be issued and/or held by their underwriters and managers doesn’t help either. My take on all this is that I will keep monitoring the funds’ quarterly reports to look for any signs that their cash flow is eroding or insufficient to pay their future distributions. So far both funds appear to have healthy future cash flows. I also know that lots of institutional investors made a lot of money holding CLOs in the past and the structure “works” as far as creating good returns for equity investors. The managers of both funds sound like they know what they’re doing whenever I’ve met with them. So for now, I’m in. · Third Avenue Focused Credit Fund (MUTF: TFCIX ). This fund has taken a pounding like all high yield bond funds. I cut my position in half because since it was a mutual fund, not a closed end fund, I could take my money out at the NAV and then re-invest it in similar assets, if I chose to, or even different assets, in any number of closed end funds, at a 10% or higher discount to their NAVs. So I figured if I were going to wait around for the market in high yield bonds to turn up, I might as well get paid a bonus for doing so. · For a similar reason I sold the PowerShares CEF ETF (PCEF ) and bought more of Cohen & Steers CEF Opportunity fund (NYSE: FOF ) . With FOF you can buy the shares at a discount, get active management as opposed to an index approach, and get a slightly higher yield. Some of the other moves represented an attempt to move out of equities and into specific credit-oriented securities that seemed particularly cheap and beaten down at the time (i.e. moves out of Eaton Vance Risk Managed Dividend Equity Income Fund – NYSE: ETJ – and Wells Fargo Advantage Global Dividend Fund – NYSE: EOD ) . Like many of my moves and portfolio tweaks, these were not because I disliked these funds, but because I saw particular opportunities on occasions in other funds. Often in the closed end fund market, because prices and discounts can be so quirky, it is a case of saying “This looks too good to be true. What can I sell to take advantage of it?” So you end up selling a position you are perfectly happy with, in order to buy something you are even happier with. (My Income Manager excel spreadsheet, that some of you also use, allows me to see at a glance as I add or subtract positions in the portfolio, what the impact is on the annual cash distribution of the entire portfolio. Anyone who wants a copy, please send me a message with your actual email address and I’ll send it to you. It’s not fancy but it works. Helps to refocus attention from the market value of the “income factory” to what the output of the factory is.) Hope that’s useful and/or interesting. As Porky Pig used to say, “That’s all, folks!” Savvy Senior Portfolio 10/29/2015 Symbol Current Yield CEF Premium/ Discount Portfolio Income % This Holding Portfolio Income % Last April Increase/Decrease as % of Portfolio income Eaton Vance Limited Duration EVV 9.22% -12.49% 10.41% 6.8% 3.57% Oxford Lane Capital Corp. OXLC 21.07% -17.94% 7.95% 4.2% 3.78% Eagle Point Credit Co. ECC 14.18% 6.95% 7.22% 3.8% 3.45% Pimco Dynamic Credit Income Fund PCI 10.44% -13.33% 7.15% 7.3% -0.17% Cohen & Steers CEF Oppty Fund FOF 9.04% -11.67% 6.52% 5.8% 0.74% Calamos Global Dynamic Income Fund CHW 11.04% -15.25% 4.37% 2.7% 1.64% First Trust Specialty Financial Oppty Fund FGB 11.24% -1.27% 4.37% 2.3% 2.02% Ares Dynamic Credit Allocation Fund ARDC 9.78% -15.43% 4.21% 4.73% -0.52% Cohen & Steers MLP Fund MIE 10.51% -11.61% 4.15% 0.00% 4.15% Pimco Income Strategy Fund II PFN 10.39% -6.29% 3.86% 4.15% -0.29% Nuveen Real Asset Inc & Growth Fund JRI 9.01% -8.19% 3.50% 3.76% -0.26% UBS ETRACS Leveraged CEF CEFL 21.90% NA 3.38% 3.80% -0.42% Babson Capital Global Shrt Duration HiYld BGH 1.97% -12.62% 3.17% 1.41% 1.76% Duff & Phelps Global Utility Fund DPG 8.59% -15.02% 2.93% 1.27% 1.66% Third Avenue Focused Credit Fund TFCIX 9.97% NA 2.92% 7.23% -4.31% UBS ETRACS Leveraged REIT MORL 23.70% NA 2.70% 2.90% -0.20% First Trust Inter. Duration Pfd & Inc FPF 8.94% -7.98% 2.61% 2.30% 0.31% Babson Capital Partners MPV 7.96% -0.59% 2.51% 0.00% 2.51% Eaton Vance Tax Mgd Global Div Inc Fund EXG 10.66% -8.22% 2.32% 3.83% -1.51% Pimco Income Opportunity Fund PKO 9.66% -3.24% 2.19% 0.26% 1.93% Cohen & Steers Infrastructure Fund UTF 8.07% -16.93% 1.85% 0.00% 1.85% TICC TICC 18.07% NA 1.79% 1.79% 0.00% Blackstone Lg/Sht Credit income Fund BGX 8.30% -15.35% 1.61% 0.00% 1.61% John Hancock Pref Income HPI 8.43% -8.79% 1.12% 2.86% -1.74% Eaton Vance Tax Mgd Global Buy Write Fd ETW 9.89% -1.58% 1.07% 3.58% -2.51% Western Asset High Income Fund HIX 11.95% -8.82% 1.02% 1.09% -0.07% Nuveen Tax Advantaged Total Return Fund JTA 8.88% -11.42% 0.85% 0.00% 0.85% Brookfield High Income Fund HHY 12.06% -11.30% 0.80% 2.61% -1.81% Nuveen Preferred Income Oppty Fund JPC 8.70% -10.47% 0.80% 3.10% -2.30% Voya Natural Resources Eq Income Fund IRR 13.33% -16.30% 0.66% 0.89% -0.23% 100.00% 84.53% Positions Eliminated Previous % of Portfolio Income Eaton Vance Risk Mgd Div Equity Income Fd ETJ 4.20% Wells Fargo Advantage Global Div Fund EOD 3.00% Credit Suisse High Yield DHY 1.70% THL Credit Senior Loan Fund TSLF 1.60% Wells Fargo Advantage Inc Oppty Fund EAD 1.40% VOYA Global Advantage Fund IGA 1.00% Powershares CEF ETF PCEF 1.00% Cohen & Steers Ltd Dur Pref Inc Fund LDP 0.90% First Trust Strategic High Income Fund FHY 0.60% 15.40%