Reviewing the 2014 Model – Blended Income

As we head into 2015 we would like to take a moment to review the 2014 Blended Income Model Portfolio.  Remember that we construct and run these models for a learning experience (for ourselves and anyone who would also like to learn).  While we don’t personally invest like any given model we do use the learnings for our personal choices–and in the near future we will list our learnings from these models dating back to 2006.

It was very satisfying to end the year with a 9.76% gain.  As in all investing, you have good years and bad years.  2013 was ok for us–but we substantially underperformed because of an overweighting of quality preferred stocks which got bushwacked in the taper tamtrum of May/June 2013 and did not climb back by the end of the year.  Our move out of MLP’s early in 2014 allowed us to make up for the very mediocre 2013 performance.

Note that in a perfect world we would like to buy income securities and never sell or trade them, but that isn’t the world we live in now–although when we review future models that we have constructed we will call into question everything we think we know.

Early in 2014 (late February) we sold 3 of our MLP holdings then sold our last energy related MLP (Compressco) in August, thus totally missing the MLP massacre.  For this we are thankful.  We would like to own some MLP’s–but we need to be able to ‘sleep well at night’.

As the year went on we expanded our holdings of ‘term preferreds’ and exchange traded debt issues with maturities shorter than 10-12 years as we were looking ahead to 2015 when there is a chance (although it is not a certainty that long rates will go up–we shall see) that interest rates will rise.  Issues with maturities under 10 years should dramatically outperform ‘perpetual preferreds’ when/if interest rates begin to rise.  It is our opinion that you don’t wait for the reality of higher rates to begin to position for them, in particular when debt issues are available that are similar in yield.

We tried to expand our REIT holdings a bit and ended the year with a 9 1/2% position in them (which we wish was 20%–hindsight is 20/20).  We are positive on REITs (in particular the smaller ones which for some reason we are attracted to) and are looking for more.  Obviously they performed well–and some we hold are up over 25%.  When we have gains like this we struggle with where the correct sell level is at – but we are not selling strength just to harvest the profits when we have no better ideas for replacement.

We didn’t do well with our common stocks, Business Development Companies (BDCs) or CEF’s (with allocations to them at 9%, 5% and 6% respectively).  I guess that is why we invest in a diversified group of securities.  Honestly BDC’s are a newer investment for us and we just don’t fully understand how they will react when the next economic downturn comes.  We plan to hold some of them (in models and personal) simply to force us to follow them closer in the future.  We have never been high on CEF’s because of the leverage they use–yes leverage helps on the upside–but can really hurt when the downturns come.  We will use them minimally in the future.

One of our biggest mistakes of the year was owning Proshares Short S&P 500 (ticker:SH).  We did unload 30% of the shares late in the year–after taking plenty of losses since purchase.  Trying to guess tops and bottoms is a fools game (obviously we are foolish some times) and we have never had luck with hedges.  We are going to work hard to stay away from them in the future.

Our biggest success of the year was in loading up on Tortoise Infrastructure Energy 4.67% Term Preferreds (ticker:TYG-B)–a very conservative AA rated issue.  Our purchase at $8.33/share was near the bottom and today the shares are at $9.87/share.  Coupled with the dividends this is one hell of a gain (for a AA rated preferred)–in fact we should likely cut back a bit on this holding.

Our 2014 Blended Income Model can be seen here