Even a Conservative Income Portfolio Must Receive Attention

We have a conservative income portfolio which we call the 2015/2015 Short/Moderate Duration Income Portfolio which has some pretty well defined guidelines–all issues in the model have maturity dates of less than 10 years–actually it should be all issues except 1 (which is Tortoise Energy Infrastructure 4.37% Term Preferred (ticker:TYG-B) which matures in 2027.

Our premise is simple on this portfolio.  Reduce volatilty, minimize trading and yet receive a fair income.  Shorter duration fixed income instruments tend to have less volatility than perpetual instruments (like most preferreds). Unrated exchange traded debt issues, riskier than secured debt, tend to have decent coupon rates–without extreme risk. Additionally issuers tend to pay large common share/unit distributions which provides somewhat of a margin of safety as the common distribution must be eliminated prior to preferred and debt distributions and interest payments being suspended. Additionally, we had anticipated that interest rates would have moved up by now, which would allow a reasonable return and at maturity one would be able to lock in a new, higher coupon. For better or for worse the last part is not working out, but not every assumption we make will be correct (we hope that maybe 1/2 of them are).

This portfolio holds just debt and term preferreds of companies that, at the time of inception, we judged to be solid enough to pay us our due and operate to maturity. Does this mean that we just lay back and collect our dividends and interest?  We wish! At least once per quarter one has to do ‘maintenance’. Honestly a little more often would be better. By maintenance we mean go the company website, click the ‘news’ tab and see what is happening with the company. We then go to Yahoo Finance and query the company to see what kind of ‘outside info’ is out there of interest.  Hopefully this 15 minute review says ‘all is fine’–if not it is time to dig deeper – read the SEC filed documents here. Then do another issue. With just 14 issues in the portfolio this is just a few hours per quarter for review. Of course if you turn up issues it will add more time to your maintenance.

Recall on the 4th of September we removed MVC Capital Notes 7.25% Notes (ticker:MVCB) from our portfolios (article is here). This BDC has not filed their 2014 annual report or their 10q’s for any quarters yet this year!! They have issues with a portfolio company not being able to close their books.  WE DON’T CARE if they have problems–get them resolved–this is what you get the big bucks for!!!!!  While we should have known about this sooner we don’t always do all the research we should immediately–but we feel fortunate to have caught it after the fact.  The shares are now 3% below our sale price.  How many holders of these notes know they haven’t filed their reports?  Which day will holders wake up and find out their notes are now $10 below the day before? Don’t be one of them.

We all overlook the maintenance of portfolios–which is why we are writing.  We have to personally improve our portfolio reviews–we don’t like surprises.

We will soon be writing on some upcoming ‘surprises’ for holders of some Closed End Funds soon—some are gettng close to breaking their ‘leverage percentages’ because of the MLP massacre–more to come soon.