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Home > Personal Finance Articles > Income Portfolios
Income Portfolios July 18, 2007
We have decided to put out another note on income portfolios. You all have
expressed concern regarding the recent downward trend of the value of the
portfolios.
Let us begin by noting that closed end funds have had a PHENOMENAL run
up since the beginning of 2006. Every asset class of closed end funds were up
significantly in 2006. Then the rally continued and through the first 5 months
of 2007, more than 90% of closed end funds were up again. Closed end funds
are not equities and have not historically trended up in prices for that long of a
period of time without some sort of pullback. A period of weakness was
bound to occur. We mentioned to many of you all through our newsletters
that the income market was looking more difficult to find GREAT
opportunities, but that at some point in the future, the opportunity would arise
again. The next few months may present this opportunity.
We see the following factors that contributed to this pullback:
• Sustained upward trend without a pullback
o See comments above
• Interest rates spiking in June
o Interest rates on government Treasury securities spiked almost
12.50%, which affects bonds and fixed income securities
• Sub-prime mortgage concerns create inflation worries
o Concerns over fed further raising rates by year-end
• Increase in closed end fund IPOs
o Often times closed end fund investors sell their existing
holdings to move into new closed end fund holdings. There
have been 27 IPOs in 2007 vs. 21 total in 2006.
Here are some things to remember as we deal with periods of weakness:
• Share prices are being hurt worse than the value of assets in the
portfolio
o Often times, investors begin selling the shares of closed end
funds without researching the health of the underlying
investments. The underlying investments are performing much
better than the stock prices on most issues. This is good.
• All Capital clients are diversified amongst fund asset classes
o It is important to stay diversified amongst closed end funds.
All of our clients hold many different closed end funds that
each hold many different investments such as convertible
stocks, adjustable rate bonds, high yield bonds, etc.
• INCOME
o Your investments are still paying a high rate of dividend
income. There is nothing on the investment horizon that
should change this. We do not see the fed raising interest rates
soon enough to cause a cut in distribution rates.
• Goal of this portion of your allocation
o Remember that the goal of your income portion of your
portfolio is general preservation of principle and consistent
income. This has been the goal of the income allocation since
day one. If your income portfolio value is more than what we
started with, we are exceeding our own expectations. If values
are not, be patient.
• Patience wins
o It has been shown time and time again that investors are much
better off riding out the weakness and purchasing more closed
end funds in their portfolio, as opposed to selling into the weak
market.
These periods of weakness are painful to endure as investors, but we are
watching all of the developments.
Mitchell Reiner
Certified Financial Planner
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