Investor Letter - January 2022
Happy New Year!
We are off to a positive start for 2022, despite general turbulence in the stock and bond markets.
Index YTD Gain/(Loss)
S&P 500 (2.79%)
Nasdaq 100 (5.39%)
MUB (iShares National Muni Bond ETF) (0.82%)
HYCB (iShares HY Corporate Bond ETF) (0.74%)
Our defensive positioning last month allowed us to slowly enter areas of the market that provide income and both defense and offense to the issues currently facing the markets.
The most difficult issues for 2022 are inflation and rising interest rates. The Federal Reserve has been supportive/dovish for 30 years and is now shifting its focus to fighting 40-year high inflation of 7%+ through a combination of tapering its purchase of securities, removing trillions of dollars from its balance sheet, and raising interest rates, possibly 3 to 5 times in 2022. The Fed is finally taking away the proverbial “punchbowl” of liquidity that has buffeted the markets for over 30 years.
What can one do with these negative forces and tidal shift by the Federal Reserve that has caused negative returns in general market indices that will likely persist through 2022?
For those more risk-averse and seeking primarily income: We have been buying Senior Secured Corporate Loan CEFs (closed-end funds) which adjust upwards with LIBOR so they defend against a rising interest rate environment. They are now paying as much as 7% - 7.5% (annual rate distributed monthly) up from 6% in October.
Additionally, we are adding emerging market senior debt and sovereign debt paying 6% - 8% (annualized with distributions monthly) which was paying 5% - 6% in October. We believe on a risk-reward basis these yields more than compensate for the risk, especially compared to equities and treasury bonds.
Depending on the client’s risk profile we are also adding high-dividend equities like the large oil and gas conglomerates we owned last year at this time, especially the oil service companies that benefit from greater production demands given cold winter weather and oil prices again over $80. We are also reestablishing positions in the oil and gas pipeline companies with dividend yields ranging from 6% to 7%. Energy and oil companies not only provide solid dividend yields but also are defensive especially if Russia/Ukraine tensions and supply/demand imbalances persist. We are also adding to some clean energy plays which pay 5% - 8% (annual rate distributed monthly).
For those with higher risk profiles desiring total return potential: We are building positions in regional banks as they are large beneficiaries of higher interest rates, and special situations, high dividend value names like Big 5 (a big winner for TRC in 2021) which has a 5% dividend yield and increased more than 4x in 2021 but is still cheap relative to its larger competitors.
In the REIT space we are focused on Storage REITs leveraging off the national moving trend; apartment REITS and specialty REITS (i.e., data storage).
Another key offense/defense play is commodities: We have established positions in metals, copper, steel, and gold. One of our largest and favorite CEFs that pays 9.4% (annual rate distributed monthly) is a well-managed CEF owing the largest gold and natural resource stocks and selling options against these to take in premium and distribute to the CEF shareholders.
For those of you new to these income strategies using CEFs (Closed-End Funds), TRC prefers to utilize them because they:
1) Trade like stocks allowing for immediate liquidity unlike mutual funds which are usually restricted from trading;
2) Can offer a NAV (Net Asset Value) discount unlike mutual funds;
3) Offer significantly higher yields than traditional mutual funds in fixed income strategies;
4) Pay monthly distributions allowing for reinvestment thereby allowing for possible faster compounding of monies.
For those interesting in learning more, please review the attached slide deck which provides a good overview of TRC’s investment strategy, and never hesitate to contact me.
For more information on CEFs, their characteristics, and how they compare to other securities and mutual funds, here are two primers to this asset class:
https://www.fidelity.com/learning-center/investment-products/closed-end-funds/discounts-and-premiums
Wishing you all the best in 2022