2023 Year End Letter
Dear Clients and friends of TRC,
While 2023 was a challenging year for income focused investing, TRC is off to a good start in 2024. As noted in the performance chart below, over the last four years TRC has outperformed most fixed income benchmarks.
The mantras of TRC remain:
1) Get paid to own it (i.e. a dividend or distribution).
2) Find the highest return while taking the least risk possible (e.g. senior secured bank loans).
3) Avoid large drawdowns with a willingness to move to cash or cash alternatives during unstable periods.
The TRC actual performance data was established on August 13, ,2020 with a $2.2 million IRA utilizing the TRC Total Return Strategy for an account at Charles Schwab & Co. compared to various fixed-income benchmarks. The TRC total return strategy combines eleven sleeves of income production described in previous letters. This total return had the benefit of many NAV discounts for the 11 Closed end fund sleeves when initially entered plus generally lower valuations which may not be the case going forward. Moreover, these returns were gross returns (before fees), had most of the closed end funds reinvesting monthly dividends, required active management and rotation amongst the eleven sleeves with occasional concentration up to 50% in any distinct sleeve (like the high-dividend equity sleeve, probably the riskiest) with this concentration offset by diversification within that concentrated sleeve. There is no guarantee that similar returns will be made in the future.
Most if not all the closed-end funds (CEFs) owned by TRC, bank loans, bonds or other, have net asset values (NAVs) that are rising again while yielding 7% - 14% on an annual basis. Most of these pay monthly distributions allowing for compounding of monies. This coupled with value-oriented equities, positions us better for total return opportunities in 2024.
TRC is focused primarily on senior secured corporate loan CEFs. With interest rates having moved up considerably over the last three years, most of our loan CEFs are yielding more than 10% and have collateral that provides protection even in the event some loans default. The protection comes from diversification, given that most of these CEFs have several hundred issuers. Furthermore, even in bankruptcy most corporate loans over the last 50 years have recovered around $0.70 on the dollar according to Moody’s analytics. Moreover, bank loans have floating rate features that float with SOFR providing protection against a rising rate environment.
With the help of Morningstar research as well as TRC’s analysis of each of our CEFs, TRC has crafted a portfolio of liquid high yielding debt securities that provide an attractive risk reward relationship compared to equities. In a bankruptcy, equities can see zero recovery of value (e.g., Enron and Bed, Bath & Beyond).
TRC is coupling these high yielding debt CEFs with high dividend equity “aristocrats” like Verizon and AT&T, as well as turnaround value stocks like Dollar General and Target to achieve a total return goal of 10% - 15% annualized. Additionally, TRC has analyzed the AI space to add names that are relatively cheap to pure play AI names like Nvidia (IBM, CRM, and PANW for example), while also having a moat or competitive advantage.
As mentioned in previous letters, the period of easy 15% - 20% annual returns of the last 20-30 years spurred on by prolonged low interest rates is over and the Federal Reserve continues to beat the drum of fighting inflation even if it risks a recession. TRC’s total return focus couples a high current yield from loan and fixed income CEFs and ETFs, with equities that either provide a consistent high dividend distribution or are cheap relative to its industry or its growth potential.
I want to thank you for your trust and allowing TRC to help manage your hard-earned monies. While TRC’s strategy is particularly attractive to non-taxable accounts (such as IRAs or 401 k’s or foundations, where there is no tax leakage from income distributions), our total return strategy should provide some growth as well as income to achieve our goal of 10% - 15% annualized returns. The Federal Reserve has made it clear that interest rates will remain higher for longer for the foreseeable future. Finally, the biggest complement you could provide TRC with a referral to other potential investors who would appreciate TRC’s investment strategy.