建立我的新10%“Cupolone”收入投资组合

My current income portfolio has performed very well so far, but some things have changed in recent months. It’s time to take a fresh look.

Because I select only high quality five- or four-star Morningstar funds, I need to update my portfolio to keep it in line with my investing principles.

I sold Eagle Point Credit Company, which Morningstar recently downgraded to two stars. I also reduced my position in NexPoint Strategic Opportunities.

In keeping with taking a fresh look at my portfolio, I plan to restructure the whole portfolio by adding new funds. PIMCO funds remain at the top of my list.

Florence is my town, and it always will be. It is a town dominated by its cathedral and its dome: a great colossus, named “Cupolone” (“Big Dome”) by the Florentines. Cupolone remains the biggest brick dome in the world, with 463 spiraling — and often crammed with visitors — steps to the top. I decided to name my 10% income portfolio “Cupolone” in its honor.

“Today, the cathedral is the defining eye-catcher of the city. With its great, eight-ribbed dome and the neighboring bell tower of the Palazzo Vecchio, Florence’s town hall, it soars above the city’s red-tiled roofs, dominating views from all directions. In 1418, however, there was a yawning void in the middle of the cathedral — and no one had the faintest idea how to bridge a gap that would require the biggest brick dome in history to date.” (Harry Mount, “600 years of the world’s most beautiful dome,” The Telegraph)

This article explains the adjustments I’m implementing to create my new Cupolone portfolio, which spans the gap left when I eliminated Eagle Point Credit Company Inc. (NYSE:ECC) and the Guggenheim Strategic Opportunities Fund (NYSE:GOF).

When I began my adventure on Seeking Alpha almost one year ago, I described how I structured my 10% income portfolio, pointing out that my basic criteria when selecting a fund is its Morningstar rating. On that occasion, I also explained that I usually weigh the load of the funds in my portfolio with a useful tool provided by NASDAQ: RiskGrades, a risk assessment tool that I employ to measure the financial risk of my investments.

In fact, RiskGrades (RG) is a trademarked method for calculating the risk of an asset. RiskGrades is a standardized measure for evaluating the volatility of an asset across a variety of asset classes. The scale starts at zero, which is the least risky rating. A rating of 1,000 equals the standard market risk of a diversified market-cap weighted global equity index. Over time, RiskGrades changed to reflect not only the unsystematic risk of an investment but also increases in overall systematic risk in the market. RiskGrades are based on a variance-covariance approach that measures the volatility of assets or asset portfolios as the scaled standard deviations of the returns. (Investopedia)

Well, I must update my strategy because RiskGrades is no longer available on the NASDAQ site. It simply disappeared when they recently restructured their website. A fellow member of Seeking Alpha, Rescue Diver, brought this to my attention.

I must admit that the disappearance is very disappointing because RiskGrades provided a simple, reliable and immediate way of measuring risk. I hope it will be a temporary disappearance because so far I haven’t found a different, yet similar and simple tool for risk assessment. I welcome any good news on this front…

When I built my 10% income portfolio, Morningstar rated Eagle Point Credit Company as a five-star fund. ECC maintained this rating up until the beginning of August this year, when it was downgraded to four stars. Then, during September, its rating fell to two stars.

(Source: Morningstar)

The following table shows the most recent net asset value (NAV) for ECC, dated to the end of September and showing a per share value of $11.40-11.50. At this point, the fund has an exorbitant approximate share price of 43% premium on NAV!

(Source: Eagle Point Credit Company)

In my September 2 article, “My 10% Income Portfolio - A Midsummer Night’s Check-Up,” with ECC still four-star rated, I stated “this downgrade doesn’t change the landscape and horizon for this fund, both of which remain strong.”

By mid-September, the new ECC two-star rating caused me to reconsider my position in this fund. I had previously reduced my position when share price reached $19 at the beginning of July. I planned to repurchase shares when the fund reached a lower price. The price recently dropped to $15, but, because I was worried by its latest distributions showing an increasing use of return of capital (ROC), I decided against repurchasing shares. The increasing use of ROC raises concerns about distribution sustainability or the risk of distribution cuts.

Other more skilled Seeking Alpha contributors recently published some illuminating articles on this fund:

I understand and agree with the considerations posed in these articles, and surely a three-star downgrade in two months isn’t sufficient alone to discard a fund, but in Florence we say “meglio aver paura che buscarne,” which translates to “better safe than sorry.” So, in the latest rebound from the recent bottom of $15, I completely closed my position in ECC, hoping to see more clear horizons in near future. (By the way, I closed with a gain thanks to the favorable Dollar/Euro exchange rate.)

Already in May of this year, I expressed some worries about the Guggenheim Strategic Opportunities Fund for resorting to a notable 27% ROC to sustain the distribution rate. Since June, ROC has grown to an alarming 60%. The enduring 10%+ share price premium on NAV seems to demonstrate the market’s faith in this fund, even if the prospects for future distributions are not promising. As I mentioned in my September article, in July, I decided to eliminate my position in GOF while I was breaking even. I plan to look for a different allocation of my money.

The following table provides a picture of the distribution sources for 2019.

(Source: Morningstar)

A similar situation exists for the NexPoint Strategic Opportunities Fund (NHF). On April 20, the fund announced a rights offering that would expire on May 22. The closing price on April 20 was $23.17. The share price fluctuates now somewhere between $17.50 and $18 with a discount on NAV of approximately 16% (NAV $21.04). A perturbing, significant 46% ROC since June suggests that the prospects for future distributions are not promising.

I bought NHF at $21.90 per share, so I’m deeply underwater. However, following a recent rebound, I made the decision to reduce my holdings in this fund, which meant taking a capital loss. I fear that sooner or later I’ll have to face a distribution cut, followed by a further fall in share price. I still hope for the best, making my decision to keep a small amount of NHF in my portfolio worthwhile.

With all of the recent developments, I had to review some of my certainties about the funds composing my portfolio. Today, I hold stock in only five of the funds that previously made up my portfolio. I call them “my veterans.”

I remain entirely confident in the performance of DSL, GGM (my only three-star fund), PDI, and PTY. For the moment, I maintain a small position in NHF.

(Source: Morningstar)

(Source: Morningstar)

(Source: Morningstar)

(Source: Morningstar)

(Source: Morningstar)

In my April article, “My 10% Income Portfolio - Exploring New CEF Opportunities,” I described seven new closed-end fund opportunities I was exploring for my portfolio. In my July article, “My 10% Income Portfolio - Researching 7 New CEFs,” I explored an additional seven candidates. My short analysis led me to believe that the KKR Income Opportunities Fund (KIO) and the PIMCO Income Opportunity Fund (PKO) may be good candidates for my portfolio. Below are the actual quotes for these funds, with NAV and price performance over the last three and a half years (from January 1, 2016 onward).

The net asset value for KIO increased until October 2017 and then slowly declined. Even though the last two years could be seen as an accumulative downward spiral of NAV destruction, the NAV at the beginning of 2016 was more or less the same as today (–1.13%), while price shows an +11.46% gain since then. Meanwhile, the return of capital has remained at a steady 4%, which indicates that the recent decline in NAV has not been ROC-generated.

The monthly premium/discount ratio chart, which follows KIO over the last six years, shows the fund currently quoting at a narrow discount. It may be a good idea to wait for the discount to spread again, while monitoring the evolution of NAV, before investing.

(Source: Morningstar)

(Source: Morningstar)

The PKO NAV shows a convincing increase since January 2016, as you can see in the following chart. Currently, the share price quotes at a rather high 10.55% premium on NAV. In this case, I plan to wait for the premium to shrink, or possibly convert in a discount, before investing.

(Source: Morningstar)

(Source: Morningstar)

After four years of “day-to-day management” of my 10% income portfolio, I recently had to accept the idea that my portfolio, at least in its original form, couldn’t last forever. I have no emotional attachment to the holdings I bought years ago, so I decided to liquidate or reduce some positions and start again with a new income generating idea for the future.

That’s the reason I decided to restructure my portfolio, baptizing it “Cupolone,” as a way of spanning the gaps in my investment plan. The core holdings in my Cupolone portfolio will be some PIMCO funds (PDI and PTY, plus PKO eventually) and DoubleLine Income Solutions. However, I feel that a wider diversification to attenuate possible drawbacks is necessary. Going forward, I plan to increase the number of CEFs I hold in order to mitigate the overall effects of volatility and protect my income from distribution cuts.

Beginning in spring, I added the following funds, all of which have a four- or five-star Morningstar rating, to my watch list:

Some of these funds quote at discount; I’ll begin with them. As always, I will continue to look for quality CEFs and describe any further selections in future articles. I believe it’s far better to buy a good CEF at a fair price than a fair CEF at a good price.

I have always thought of investing as a full-time occupation, if not for the time one can spend, at least for the energies and openness of mind it requires. Investing asks you to be always “in the zone” and consider it a financial undertaking, not only a simple allocation of money.

As in every business, you must take into account that you can make poor decisions or even lose money. It’s the price of your personal “enterprise” and the difference between looking for yield and settling for an annuity. I’ve probably made some mistakes and I’ve paid the price for those mistakes. If you can’t stand the idea of balancing revenue and expenditure within your portfolio, you better buy Treasury notes.

I am/we are long DSL, GGM, NHF, PDI, PTY.

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.