收入实验室想法：资本保全的地方

The increased volatility has been on the top of people\'s minds lately, with the trade war escalation and slowing global growth.

One should always remain disciplined to their strategy, even in times of volatility but hiding out in certain assets may let you sleep better at night.

This is a breakdown for investors that are searching for capital preservation and defensive sectors.

An investor with a long-term focus shouldn't go and make wild changes to their portfolio during times of volatility. This is true, even with fears of a recession on the horizon and trade war escalations. Remaining focused has served investors well, just as we discussed previously in our "Income Lab Ideas: Pullbacks, Corrections And Bear Markets" article. Some investors do have a focus on capital preservation though. Also, taking some profits off the table isn't a bad idea either when you are presented with the opportunity. So, where can you hideout your assets until you're more comfortable? Or even if you are just taking profits at this time, where can you store this cash so it isn't collecting only dust? That's what we are here to discuss today!

We have discussed several funds recently that should provide more of a safe haven for putting cash to work. These include Reaves Utility Income Fund (UTG), John Hancock Tax-Advantaged Dividend Income Fund (HTD), Cohen & Steers Infrastructure Fund (UTF) and Cohen & Steers REIT & Preferred Income Fund (RNP), among others. They have all performed very well on a YTD basis, and even long-term they have provided attractive returns.

Data by YCharts

The above is a chart of their total market returns YTD. Below is a chart of their total NAV returns. We see that the market returns have outpaced NAV returns so far this year. These funds had been trading at considerable discounts before this year. The discounts have all but disappeared now, as a flight to more defensive sectors has been the driving force for the narrowing valuations.

Data by YCharts

In fact, UTG is at a premium of 4.83% now. HTD is at a shallow discount of 1.38%. RNP is still at an attractive discount of 4.75%, but its 1-year average discount is around 10%. UTF is similarly at a shallow discount of 1.79%.

These names provide diversified holdings in sectors and asset classes that are mainly defensive. In the case of UTG, UTF and HTD, they are invested in defensive utility names. HTD and RNP, additionally, are invested with considerable exposure to preferred shares as well. Preferred shares offer further downside protection as they tend to trade reasonably close to the par value of the issue. RNP also has a focus on REITs, as their name would suggest. UTF is more aggressive though than the others mentioned and is more heavily invested in infrastructure names. These are also attractive as strong cash-generating businesses but don't necessarily hold up as well compared to utility companies.

The overall market has performed well this year too, with S&P 500 ETF (SPY) showing a return of 18.05%. We can keep in mind that the SPY ETF isn't an appropriate benchmark for the funds discussed, but just used in general as an investable way in the broader market. Though the names listed above are up considerably more.

This also has to do with the Fed now seemingly gravitating towards a more dovish stance of rate cuts. Investors still require income in retirement or their overall investing strategy. This leads to companies that can offer higher yields to be bid up. Dividend investing is one of the most popular ways to invest, with the biggest benefit of having steady cash being paid out and in hand! Additionally, the safest yielding investments like U.S. Treasuries have been bought up hand over fist and dropping the 10-year down below a 1.6% yield. That isn't very attractive. This is where the defensive sector of utilities, typically strong cash-flow REITs and preferred securities come in handy. These sectors and assets easily beat out Treasury yields by a significant margin.

With all that being said, an investor may still be looking for even more defensive positions. These are assets that go away from equity positions completely! Because even though the nature of the underlying holdings above are defensive, in a prolonged or severe recession, they are still going to get sold off. It is just that they may not experience the maximum drawdown that other sectors will experience.

Additionally, CEFs are well known for trading at discounts and premiums, leading to sharp sell-offs when their NAVs may not drop nearly as far. Generally, this is a time to be buying those assets. Buying $1 of assets for $0.90 or more is quite attractive!

Data by YCharts

Data by YCharts

As we can see for UTG and HTD, sometimes their NAV and market price can be trading at significantly different valuations. In addition to that, they sold off with the rest of the market in the GFC of 2008/09. That severe crash was likely a once in a lifetime event for most of us though, and the next recession experienced shouldn't be such a broad sell-off.

For investors that are truly looking for capital preservation, investments in ETFs may provide better stability, as ETFs generally trade at their NAV price, with little variation. This is because of their creation and redemption mechanism that makes sure to keep the share price close to the NAV price. In contrast, CEFs are based on true supply and demand that lead to discrepancies in their pricing reflected by premiums and discounts to their underlying NAV.

To go even more defensive though,

and therefore, total returns overall. There is a direct correlation between risk and reward when investing. However, investors that are looking for capital preservation may not be as fixated on their total income but rather protecting what they have. For these investors, making a shift towards more investment-grade corporate bonds may make sense. Even including some U.S. Treasury ETFs or Municipal holding CEFs if you are concerned with capital preservation. Of course, the "safest" investment is in U.S. Treasuries, followed by Municipal funds and then investment-grade corporate bonds, in general.

All investing involves risk though, the only truly 100% risk-free place to park cash is in savings accounts and CDs. That is the only place that can have guaranteed "returns."

We can get started with some basic "cash alternatives". The SPDR Portfolio Short Term Treasury ETF (SPTS) is just a basic ETF that invests in U.S. Treasuries that have a remaining maturity between 1 and 3 years. The shorter duration of the ETF should help to reduce volatility as well. The fund's expense ratio comes in at 0.06%. Total assets of the fund are $1,575.85 million.

Data by YCharts

Data by YCharts

SPTS does pay a monthly dividend, with the most recent at $0.0557 per share. This rate varies monthly. When interest rates were rising, the payout was climbing. This is to be expected, however, the opposite is now true as rates are declining. The Fed is decreasing its target rate, which in turn will make Treasury yields fall. Additionally, the fact that U.S. Treasuries have been being bid up (lowering yield) will also negatively affect their payout going forward.

Data by YCharts

Similarly, PIMCO Enhanced Short Maturity Active ETF (MINT) can also be used as a "cash alternative". With MINT they are invested in a "broad range of high-quality short-term instruments." The effective maturity is currently at just 0.28 years. The fund has an expense ratio of 0.42% and total assets over $12 billion.

For a more in-depth analysis of MINT, members can read Stanford Chemist's prior coverage.

Data by YCharts

MINT also offers investors a monthly dividend. The current dividend is $0.23 and they have been paying out this same rate for this whole year. They had previously varying payments similarly to SPTS so it would be interesting if they can continue with more consistency.

Data by YCharts

These are two examples of ultra-conservative/capital preservation choices. I would be looking to hold for a relatively short period of time, as a way to store some cash until better opportunities present themselves.

What makes the U.S. Treasuries one of the safest investment in the world? The fact that they are backed by the full faith and credit of the U.S. Government, and the full power of taxation on its citizens!

To increase the risk just ever so slightly, we can look at a municipal bond CEF. This will give us a larger yield, but of course, the risk goes up too. Except, I believe that an investor can have a more permanent place in their portfolio for munis. This is because they can be quite attractive due to their tax-free distributions on the federal level. Additionally, muni funds and bonds can be a diversifier in an investor's portfolio.

Nuveen Quality Municipal Income Fund (NAD), is an overall solid choice I believe. One thing to consider though is that since this is a CEF, we are going back to having large discounts and premiums at times. Therefore, even if the market price is selling off hard, the underlying NAV isn't necessarily doing the same!

Also, NAD uses leverage, which can add some unique risks and rewards as well. If they can earn above and beyond what they pay for leverage, then this becomes helpful to an investor. However, if they aren't able to invest in something with a higher yield, this would be a drag on performance.

Data by YCharts

The fund "invests in municipal securities that are exempt from federal income taxes. The fund uses leverage. By investment policy, the fund may invest up to 35% of its managed assets in municipal securities rated at the time of investment BBB and below or judged by the manager to be of comparable quality."

This means that NAD can invest in lower-rated or junk munis for 35% of their portfolio. This offers some exposure to higher yield and higher risk, while a large majority of the portfolio is investment-grade.

NAD has total managed assets of $5,059.233 million, making this a very large CEF. The expense ratio is 0.94% and when including interest rate expense, this climbs to a total expense ratio of 2.33%. Their distribution has been slowly going down over the last several years, the last cut taking place when they announced their October distributions. The distribution went from a $0.0575 payout to $0.0535.

Data by YCharts

Also keep in mind that NAD has a long effective maturity, currently at 20.56 years. When leverage-adjusted the effective duration drops to 11.28%, still a considerable amount of time.

Effective Maturity

Effective Duration

The longer the duration, the more volatility that the fund will experience, in general. However, in the case of NAD, the underlying holdings are in munis which should provide stability overall.

For additional ideas on Muni CEFs, the CEF/ETF Income Laboratory offers the Taxable Income portfolio. The portfolio targets holdings that are tax-advantaged in nature. The current yield of the portfolio is 6.16%. However, with the mandate of sheltering assets from tax obligations - an investor can keep more of the cash that is generated without paying Uncle Sam! About half the portfolio is in Muni focused CEFs, so a member can get some more ideas for safer - capital preserving - investments. Some of the funds currently include; Eaton Vance Municipal Bond Fund (EIM), BlackRock Municipal 2030 Target Term Trust (BTT) and PIMCO Municipal Income III (PMX).

In addition to muni CEFs, the portfolio offers a ~65% allocation to other fixed-income assets. These should prove to provide stability during times of market volatility.

Similarly to Treasuries, these muni bonds are backed by the full faith and credit of the issuer. These can include states, counties and local governments. With, you guessed it, the full power of taxation on its population!

Both Legg Mason funds, Western Asset Investment Grade Income Fund Inc. (PAI) and Western Asset Investment Grade Defined Opportunity Trust Inc. (IGI) are investment-grade focused bond CEFs. They have both traded relatively flat in share price since inception. Which is great for an investor looking for capital preservation!

Data by YCharts

PAI has been around a lot longer than IGI. IGI has an inception date of 6/26/2009 and PAI was incepted on 3/22/1973. They are also both trading right around their usual 1-year discounts.

Data by YCharts

It should be noted that these funds are smaller in total managed assets. IGI has total assets of $228.955 million and PAI has total assets of $146.036 million. This can cause issues with liquidity by low volume. Although, neither fund utilizes leverage either, taking out the risk (and benefits) that comes with that.

In fact, as of writing, their yields are only slightly higher than NAD. But again, NAD utilizes leverage and does have some lower quality holdings. PAI yields 4.59%, and IGI yields 4.89%. When factoring in the tax-free status of NAD's distributions too, the final income received could be less; this would depend on an individual investor's tax bracket.

The expense ratio for IGI is 0.76% and PAI has an expense ratio of 0.75%, which I believe are completely reasonable.

Investment-grade bonds are higher on the scale of safety due to their creditworthiness of the issuers. These are larger companies with a solid track record of stability. Additionally, bondholders are the first in line to get paid in the unfortunate event of a bankruptcy. They are above or senior in line to common and preferred share issuances of said companies.

An investor looking for capital preservation may do well by having a large number of assets moved to fixed-income investments. The U.S. Treasuries, Muni funds and investment-grade corporate bonds may provide a safe haven for investors that are waiting out market uncertainties. We need to keep in mind that one shouldn't radically alter their long-term portfolio strategy due to some short-sighted volatility.

Additionally, some of the holdings above mentioned may be a good place to park cash if you have taken profits and are waiting to reenter new positions at a more opportune time. For those that seek capital preservation, there are plenty more options on the table. But, I wanted to highlight a select few that I believe have the potential to be a place of safety.

In general, if you are the investor that is just looking for a place to park your profits while waiting, these should be short-term considerations. An investor that is typically more aggressive in nature is likely to not find the discussed funds attractive for a longer-term period of time. This is especially true for the U.S. Treasury ETF, SPTS, and the ultra-short-term high-quality holdings that are in MINT.

Muni and investment-grade bonds can be a permanent fixture in a portfolio for those that are in retirement or want lower volatility and are more concerned with the loss of capital. This asset class is another example of being broadly diversified with different asset classes overall. So when certain assets move one way, you have investments that move the other and vice versa.

I am/we are long HTD, RNP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.