Generating Income From Unlikely Sources: Financial Advisors’ Daily Digest
SA Dividends, Income & Retirement Editor Robyn Conti here, subbing in for Gil, who’s observing Passover this week. I’ll do my best to fill his very talented and knowledgeable shoes, and continue to keep you up to date daily on the latest FA analysis and news here on Seeking Alpha. Generating income these days is more difficult than ever due to the low rate environment, but that hasn’t stopped masses of investors from jumping with both feet into income investments that are too costly relative to their yields. Joel Johnson from True-Bearing.com emphasizes the importance of helping income-oriented clients invest for specific outcomes, and talks about how those solutions are more likely to be found in more “off the beaten path” investments, which present profit-generating opportunities for advisors: Outcome-oriented investing, once dominated by institutions offering low cost defined benefit plans, is a challenging job… Investment advisors can now create risk-aware portfolios designed to meet the specific income needs of their clients. The portfolios contain funds that invest in non-traditional sources of income. The portfolios should feature investments that are not overly expensive. Investing in themes is integral to generating alpha and hedging your portfolio against macroeconomic changes…” Harry Long’s article on ETF dividend strategies dovetails nicely, proposing several ideas for seeking out alternative income instruments while avoiding volatility. In contrast, on the subject of outflows from income investments, if you or your clients have muni bond funds coming due in the next few months, now’s the time to take action. SA contributor Patrick Luby highlights an historical summer trend in muni bond redemptions , per Bloomberg: … this year is expected to follow the same pattern, with $38.2 billion rolling off in June, $33.5 billion in July, and $29.9 billion in August. (The monthly average this year is just under $26 billion.) Forecast redemptions include maturing bonds as well as bonds that have been advance refunded or current refunded and are expected to be called away. For those fond of quick math, that’s more than $100 billion in redemptions — quite a round, and a rather hefty, number. Luby points out that, while reinvesting principal is generally an attractive benefit of owning individual muni bonds, due to the current rate situation and economic uncertainty, advisors and their clients may be unsure how to, or even if they want to, reinvest. He suggests those who have bonds coming due (maturing or pre-refunded) in the next several months consider the following: Changing asset allocation by using redeemed municipal bond proceeds to invest in another asset class will cause a shift in the overall portfolio risk profile, and should not be done unless called for by the investment plan. Don’t wait for the principal to be returned to you to consider what to do. Due to the volume of principal that will be seeking reinvestment, muni bond investors may find themselves competing with each other for a limited supply of appropriate bonds. Investors in high-tax jurisdictions with a preference for in-state double-exempt bonds may find their options even more severely reduced. Consider making provisions for reinvestment in advance of your bond’s redemption date. Pay attention now to the new issue calendar for appropriate issues that will settle after the maturity date of your maturing/refunded bond. As an alternative to individual bonds, you may wish to consider using a municipal bond ETF to maintain asset class exposure while waiting for a suitable replacement security. (To learn more about doing this, read my recent article about using duration as a guide to selecting municipal bond ETFs, available here .) These are definitely items of importance for advisors and muni bond investors to keep an eye on should redemptions proceed as forecast. Finally, since there appears to be quite a hefty focus on oil, where it’s headed, and the frothy politics involved therein, here are several stories offering a variety of views and insights on the volatile commodity: Daniel Jones takes a particularly bullish view on oil . However, Simply Investing says don’t expect the rally to last for long . The Heisenberg breaks down the nefarious geopolitics of oil price movements . Resident SA commodity expert Andrew Hecht explains how to read the “tea leaves” for crude following the OPEC stalemate in Doha earlier this month.