While on vacation in August of 2010, at the Harbour Island home of the Sports Illustrated Swimsuit Reunion (All-Star Model Cover Model Reunion - Rebecca Romijn SI Swimsuit ... ), I came up with the idea of constructing a high-yielding Supermodel Portfolio. I used the rather weak analogy that constructing a supermodel portfolio was similar to constructing a supermodel photo shoot. Namely, find some very appealing assets that will help you achieve your goals, while making sure that you have enough diversity to manage risk. The goal was to construct a portfolio of securities that would deliver a current yield that was twice the level of inflation after fees, with a minimum level of volatility. This portfolio would be constructed using ETFs of High Yield Corporate Bonds, Mortgage REITs, Master Limited Partnerships, and Convertible Securities. The current yield (income being distributed) at that time was over 8%, while 10 year Treasuries at that time yielded 2.7%. I used my own assets, and those of one very trusting client, as guinea pigs. Here's a copy of that August 2010 post ...Rockhaven Views: Supermodel Portfolio
The Results:
After 21 months the High-Yield Supermodel Portfolio was up about 18%, or 10% annualized. As expected, most of the return has come from interest & dividends of about 8.5% per year. While I fully expected a fairly volatile ride due to the belief that higher yield equals higher risk, I was pleasantly surprised that the portfolios standard deviation (volatility) over this 21 month period was 3.07%, which compared very favorably to the S&P 500's volatility of 4.4%. The worst one month return (drawdown) was -5.4%, which also compared favorably to the S&P 500's worst month of -6.92%.
So far so good, our High-Yield Supermodel Portfolio has achieved its goal of yielding more than twice the current inflation rate at a very manageable risk level. However our portfolio, like all aging supermodels, needs constant maintenance, diet, exercise, and an occasional tweak here and there. Over the last couple of years the portfolio has evolved to take advantage of what the markets are offering. We've also taken a more disciplined look at how we can manage volatility. Securities generally yield more for two reasons. One, investors perceive them to be of higher risk. In other words, investors question the ability of a company to continue paying at its current rate. Second, certain securities like REITs, MLP's, and Royalty Trusts, have certain tax advantages at the corporate level that enable them to pay a higher portion of earnings in the form of dividends. In our search for yield risk is a constant companion, but risk can be managed through diversification and disciplined tactical asset allocation.
The Portfolio:
Todays High-Yield Supermodel Portfolio is composed of the following assets:
High-Yield Corporate Bond ETF
Mortgage REIT ETF
High-Yield Preferred ETF
Master Limited Partnership (MLP) ETF
Emerging Market Bond ETF
Special Opportunities
Today the portfolio yields about 6.75%, which achieves our goal of a yield twice the inflation rate net of fees.
The Opportunity:
Yesterday the German government sold two year German Bunds with a yield of 0.00% (not a typo). Here in the US our Fed is determined to keep interest rates at zero for the foreseeable future (ZIRP), and the US ten year bond now yields 1.72%. The developed worlds governments are hard at work implementing financial repression; stealing from savers and rewarding debtors (they being the biggest debtors of all).
There is still some hope for us savers. It's not risk free, and it does require a bit of work, but there are ways to generate yield while managing volatility.
Starting today I am taking on new clients that might be interested in a High-Yield Supermodel Portfolio, if this is something that may be of interest to you, or if you'd just like to talk, please give me a call.
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
For prior Rockhaven Views visit:
This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
No comments:
Post a Comment