Alpha Gen Capital
Getting Started: An Introduction To Our
Portfolios
Dec. 06, 2019 1,47 PM ET | 8 Comments
Summary
Overview of the portfolios.
How Do I Start Building My Own Portfolio?
How To Trade CEFs.
Why We Use CEFs?
Which Portfolio Should I use?
Yield Hunting has expanded to have three different portfolios for members to
"follow" when constructing their own portfolios. For all the portfolios, we favor
not trading over trading. If you are more of a buy-and-hold investor, this
service is more geared towards you. Still, there will always be some trading.
Core Income Portfolio: This is a low-maintenance portfolio that is well
diversified among fixed income sectors. We take a hands off approach
instead of constantly trading. This portfolio is similar to one I have been
managing for more than 15 years. Our goal is to generate a yield between
7% and 9% with the least amount of risk possible. We use closed-end funds
for this primarily because of the benefits of that "wrapper." At some point,
you may see one or two ETFs in the portfolio.
Benchmark: Barclay's US Aggregate (AGG)
Secondary Benchmark: Amplify High Income (YYY)
Flexible Income Portfolio: Primarily geared towards traders and those that
want a stronger total return. We attempt to find the most oversold CEFs that
may have some catalyst for mean reversion (the tendency for a CEF to trade
back towards their long-tern average discount). This portfolios tends to
have more trading (2-4 trades per month) depending on the opportunities.
In this strategy, we attempt to generate a total return approach by buying
highly discounted funds or piggybacking on activism (when an institutional
player attempts a proxy battle).
Benchmark: Barclay's US Aggregate (AGG)
Secondary Benchmark: Amplify High Income (YYY)
Taxable Income Portfolio: The goal of the Taxable Core is to assist those
with high taxable income that pushes them to the highest brackets in the
income tax schedule. We already have the Muni Core (on the sheets) and
we recommend using that as your primary source adding select muni CEFs
at opportunistic prices/times. The portfolio is 60% tax-free income with the
rest of the portfolio a mix of tax-efficient equities, real assets (real estate),
and MLPs. The yield target is about 5% with the majority of that being either
tax-free or non-ordinary income. The trading activity will be relatively light
here (1-2 trades per month on average).
Benchmark: VanEck Vectors CEF Muni (XMPT)
Secondary Benchmark: Amplify High Income (YYY)
*Some income is tax-free
How Do I Start Building My Own Portfolio?
This is probably the number one question we receive. The problem is it is
HIGHLY member specific. Each individual member has specific circumstances
and objectives, risk tolerances and level of investment sophistication. Our
Google Sheets that house the portfolios have a column for "rating". This is
an indicator whether the current valuation is Buy, Sell, Hold.
Please note, for the Core Portfolio, we also have a "Hold/Sell" rating which
means the valuation is above our sell threshold but we have yet to find a
suitable replacement for it. In these circumstances, total return investors may
want to sell while income investors may just want to hold. Again, individual
circumstances dictate your decision.
To decipher the kind of investor you are, please see our article titled "What
Type of CEF Investor Are You?" The article goes through the differences
between the total return investor and the income investor.
For those starting out, we would obviously focus on the funds that are "buy"
rated. Investors may want to start out with "starter positions" buying
incrementally over time. For a 6% position, as an example, you may want to
slice it up the trades into thirds making three purchases over the course of
three weeks, or even three months, depending on the income needs and
valuation.
Even "hold" positions could be bought. The sheets have the current discount
and the "buy under" discounts allowing them to assess whether or not the
shares are "close enough" to a buy for their liking. Or, you could set limit orders
at or near those buy under levels and simply wait for the market price to come
to you.
Where To Find Them?
Members can access the various different portfolios and master lists on the
"Tools" drop down menu located on the top right side the main page.
The link will open up a Google Sheet (looks like Excel). The links change each
month (on the first day) so be sure to use the Tools drop down when
accessing.
Which Portfolio Should I use?
We have been managing the Core Portfolio in some form for a very long time
(>15 years). The portfolio can be used in IRAs and non-qualified accounts (see
column U on the sheets on whether the positions are appropriate for the IRA).
We use a combination of taxable and tax-free bonds so where you place the
positions matters. Obviously you would not want to place the muni CEFs in
your qualified (IRA) accounts.
Some members spread the positions across multiple accounts placing the
taxable funds in their IRAs and the more tax efficient funds in their non-
qualified (taxable) accounts. This clearly takes more labor and planning but is
the right way to manage it.
Each portfolio is slightly different taking care of a specific need.
The Core is a blended portfolio that spends less time on tax efficiency and
more time on generating a high income stream for the least amount of risk.
This portfolio is better suited for a qualified (IRA) account given the amount
of ordinary income it produces.
The Flex is that total return approach taking advantage of special situations
and arbitrage opportunities. As we noted above, this is less of a tax play and
more of a trading opportunity (more trades) strategy exploiting anomalous
discounts. This can be placed in either qualified or non-qualified accounts.
The Taxable Portfolio is for those in the higher income brackets (32%+) who
want to generate a strong AFTER-TAX income stream. The portfolios are
heavy in munis which lowers overall risk but that is offset by heavier equity
allocations (mostly option writing funds that provide tax efficient income
streams) which are a bit riskier. Should be in non-qualified accounts.
Why We Use CEFs?
1. Inefficient marketplace
2. Ability to hold less liquid bonds
3. No cash flow problem
CEFs are one of the last bastions of inefficiency in the markets. They are
exchange traded which gives you daily liquidity but without the "cash flow
problem" inherent in open-end mutual funds ("OEFs") or exchange traded
funds ("ETFs"). A CEF will not allow you to double your money overnight.
Instead, our goal is to significantly improve upon fixed income returns without
adding too much in the way of risk.
CEFs are geared towards income.
Most of the bond funds pay monthly cash distributions which are perfect for
paycheck replacement. The additional benefit over the majority of OEFs and
ETFs is that CEFs pay consistent cash flows. That allows for the planning of a
certain amount of income production on a monthly basis.
Since CEFs trade away from NAV, and are less liquid than most ETFs and
individual stocks, they can make irrational moves. The discounts sometimes
produced look like risk but are in reality an opportunity (more on this below).
CEFs are not an asset class but a "wrapper" that houses an asset class or
multiple asset classes. Most investors, even the more sophisticated, don't
have the extensive knowledge to build an individual bond portfolio to
compliment their dividend stock positions. The CEF wrapper allows the do-it-
yourself investor to buy 'pools' of bonds while trading and creating capital
gains through the purchase at wide discounts.
The largest reason we use CEFs is the CASH FLOW PROBLEM.
What Is The Cash Flow Problem For Open-End Mutual Funds?
The problem stems from the ability of investors to purchase or redeem shares
of an OEF at any point before 4,00pm EST. The portfolio manager of that
mutual fund needs to contend with DAILY cash flows into and out of their fund.
A former portfolio manager friend of mine who ran a larger high yield bond
mutual fund used to say that investors would pull money every day the market
was down and add money on up days, without fail. All those inflows and
outflows create a performance drag on the fund.
This problem does not exist in a CEF. By definition, the fund is closed meaning
This problem does not exist in a CEF. By definition, the fund is closed meaning
no new cash is accepted. This is especially beneficial today as interest rates
have plummeted.
New investors into large open-end bond mutual funds get the ability to
piggyback older investors producing some additional yield above current rates.
Think about this example: I launch a mutual fund in 2007 with $1M in assets.
The assets yield 6.5% which is about where BBB- rated investment grade debt
traded at the time. Three years later, interest rates plummet to near zero and
money flows into fixed income. Tons of new capital flows into my fund
ballooning the assets to $4M. The new rate of interest is 3.5%- still higher than
the current rates at the time but far less than what it was trading before.
What happened? The older investors (those that made up the original $1M,
got diluted away and the new money (the additional $3M) was invested at
the then, current and much lower rates. The old assets weren't sold or
matured, but they became a very small portion of the portfolio.
Again, in a CEF, there is no "cash flow problem", inherent in both ETFs and
OEFs. The ability to buy and sell daily in these open structures makes for
an extremely inefficient wrapper, especially on the bond side. The ability
for the portfolio manager to avoid forced-selling in down markets (due to
redemption requests) means that they could take advantage of the higher
yields in illiquid bonds and hold them to maturity.
Here's a great example of the difference that the cash flow problem can cause.
The turnover ratio for a traditional total bond fund solution is typically in the
hundreds of percent. As an example, PIMCO Income Fund (PONAX) has a
turnover ratio of 472%. Fidelity Total Bond (FEPIX) has turnover of 170%.
That means that Fidelity Total Bond bought and sold 170% of the current
assets of the fund over the course of the year.
We can compare that to another bond fund like Blackrock Credit Allocation
(BTZ) which has just 30% turnover. Or better yet, PIMCO Dynamic Income
(PDI) which reports just 12% turnover. That turnover can be a significant drag
on performance. The cash flow problem is one few investors know about.
How To Trade CEFs
One of the popular misconceptions about closed-end funds ("CEFs") are that
they are an asset class. They are NOT. They are a "wrapper" or security type
much like an exchange traded fund ("ETF"), open-end mutual fund ("OEF"), or
individual stocks.
Each security type has their own unique characteristics. CEFs are no different.
In fact, they are probably the most unique and esoteric security type among
the most popularly traded wrappers.
Investors not familiar with them should know that they trade very differently
from large-cap stocks like Apple (AAPL) or open-end mutual funds. On the
latter, the investor who is buying or selling shares of their OEF are doing so with
the fund company. In other words, if they are buying shares of a mutual fund,
the fund company itself is creating the shares and 'selling' them to you. The
same when you sell shares of a mutual fund. The fund company is 'buying'
them from you.
In the case of a CEF, the number of shares are fixed. That creates a distinct
difference between them and mutual funds. In fact, they trade for more like
stocks. When you buy shares of Apple, you are not sending Apple your money
and they send you shares. You buy your shares on an exchange (or market)
where buyers and sellers meet to exchange stock. The new share issuance
from Apple does not change. The price for a stock trade is the agreed upon
price for the transaction.
This is similar to a CEF. This is why the CEF can trade away from their net asset
value ("NAV"), or the underlying value of all the holdings on a per share basis.
This is the value if the fund were to liquidate, what each investor would receive
per share. This is why there are discounts.
Risk is overstated.
The risk of a CEF is typically judged by the volatility in the price of the fund.
Since these funds often trade a relatively small number of shares per day,
these price movements can be exacerbated.
CEF Price Risk Is Opportunity; NAV Movements Are The True Measure Of
Risk
Members should be careful placing orders. My favorite strategy is to use limit
orders staggered at various discount levels and wait (patience is one of the
hardest parts of this) and let the price of the CEF come to you. For example, if
fund ABC is trading at $10.00 per share equating to a -10% discount and the
buy under threshold is -10.50%, we may place the first purchase (one-third or
one-fourth of the total future weight of the position) at a price corresponding
to that -10.50% level. The next purchase tranche would be at -10.75% and a
third purchase tranche at -11.00%.
For those who would rather get their income stream going and are less
concerned about price paid, you may want to enter limit orders that split the
bid/ask. What that means is each fund has a certain 'bid price' or price where
there is a current active order for a purchase, and a certain 'ask price' or price
where there is a current active sell order. If that bid/ask looks like $9.90 /
$9.98, you may want to enter your buy limit order at $9.98 to ensure
execution. Most of my orders tend to 'split' the bid / ask meaning the price I
place my limit order is right in between the two price levels. I tend to always
get executed and I end up saving a few cents per share.
Where Are The "MUST BUY" Alerts That Other Services
Put Out?
This service is not one of those newsletters that puts out a new buy alert every
other day. Our goal is hitting singles and doubles on a consistent basis. That
means generating a total return of 8% to 10% per year with far less downside
risk than an equity portfolio.
Hitting Singles And Doubles
Hitting Singles And Doubles Revisited
Sure, we won't ever post a huge 100% return year. Most of those bullish picks
are simply click bait to attract new members. They entice novice investors
through a simple and innate human emotion.... GREED.
Most of these services provide stellar returns because they are selecting high
beta stocks. These are stocks that tend to move more than the market. For
example, a beta of 1.20 means the stock more 20% more than the S&P 500. In
an up market (bull phase), you tend to look like a genius. The question is what
happens in the down market.
This is not the type of service we operate. Our goal is to provide a lower risk
income stream to either compliment your stock portfolio or to generate your
yield without the same level of risk. The service is geared towards providing
you portfolio construction tips- since how the various positions fit together is
just as important as choosing the positions themselves.
----------------
Please leave a review Yield Hunting HERE!
-----------------
December Newsletter
Google Sheet Models and Fund List
Core and Peripheral Portfolios
Flexible Income Portfolio
Low Maintenance Portfolio
Taxable Core Portfolio
-----------------
Take a look at our Website:
[Link]
All of our public articles are linked there. While there, check out our retirement
series titled:
Retire With Yield - Retirement Series Blog
-----------------
Recent Trade Alerts:
*Most of our buy alerts are in our weekly and monthly letters
Flex Trade Alert: Sell IHIT, IHTA | Buy NHF
Trade Summary - October 2019
Trade Summary - September 2019
Sell Alert: Delaware Invest National Muni (NYSEMKT:VFL)
Trade Summary - August 2019
Sell Alert: PHT, WEA, BGX, and ACP
Flex Buy Alert: Buy (NYSE:IHIT) and (NYSE:IHTA)
Quick Reference Guide To Yield Hunting: FAQs And Terms To Improve Your
Subscription Experience
YH: Welcome to Yield Hunting
YH: FAQ and Frequently Asked Questions
YH: Getting Started Primer on DIY Investing
YH: Using the SA Chat
Portfolio Tracker v. 1.0
Portfolio Income Tracker
Yield Hunting Essential Reading:
Retirement: Sequence Of Return Risks In Retirement
What Are The Best Distribution Retirement Strategies?
Should You Own Bonds In A Rising Rate Environment?
Hitting Singles and Doubles
Hitting Singles and Doubles Revisited
What's In Your Safe Bucket?
Select Articles from our Retirement Series:
Retirement: How Will The Wealth Tax Affect You?
Retirement: Rich Flight Continues From High To Low Tax States
Retirement: What Is A Mini Retirement And Is It Right For You?
Retirement Series: Possible Coming Changes To Your Retirement
Retirement Series: Will Social Security Be Around For You?
Retirement Series: Estate Tax Vs Inheritance Tax Vs Death Tax
Retirement Investing: Time To Rebalance!
Retirement Series: Best Way to Leave Your Wealth to Your Heirs
Retirement Investing: Roth IRA Conversions - When, Why And How
Retirement Living: Best Places To Retire For Your Retirement Income
Retirement Investing: How Does A Backdoor Roth IRA Work?
Retirement Investing: Sequence Of Return Risks In Retirement
Retirement Crisis: It's As Simple As Not Saving Enough
Retirement Income: Strategies For Today's World
Retirement Dream Job: Using Retirement To Fund A New Business
Retirement Investing: How To Best Save For Your Child's Education
-----------------
Switch To Annual Plan Membership
For those members who are still paying the monthly rate, we would
recommend switching to the annual given the cheaper price.
All monthly would be at the current annual rate:--> Annual: $525
That's a 25% savings over the monthly rate!
If you are interested in switching to an annual payment system, please email:
subscriptions@[Link]
All you need to do is mention that you are a member of Yield Hunting and that
you wish to convert to an annual payment plan.
-----------------
Don't forget to follow us on LinkedIn and Twitter:
Yield Hunting by Alpha Gen Capital | LinkedIn
Yield Hunting (@Yield_Hunting) | Twitte
Disclosure: I/we have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving
compensation for it. I have no business relationship with any company whose
stock is mentioned in this article.
