My 9.5% Income Portfolio - The View From The Top

seekingalpha09-09

Total Return is a percentage measure reflecting the total performance of a fund, incorporating both capital gains and the effect of dividends reinvested over a specific period.Net Asset Value is the ...

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The fund’s per-share NAV is found by dividing NAV by number of shares outstanding.A positive Total Return with a negative NAV performance creates dissonance in my opinion, whereas having both values positive gives a favorable indication of the quality of a fund.In this article, I examine the ratio of Total Return to NAV performance of all the securities in my portfolio to identify those that have reliably created the most wealth.  Aerial view of Aiguille du Midi. Gregory_DUBUS/E+ via Getty Images Summer, Mountain Time The Aiguille du Midi is a spire (3,842 m) located in French territory in the northern part of the Mont Blanc massif. It is reached from Chamonix by a daring cable car that’s popular with tourists and skiers, who then return to the valley via the long Mer de Glace glacier. From its summit, there is a marvelous view of the rocky ridges of Mont Blanc du Tacul and Mont Maudit, whose peaks draw the eye all the way up to the snowy panoply of His Majesty Mont Blanc, the roof of Europe at 4,806 meters (13,000 feet). For those coming there from Aosta Valley, Italy, there is the spectacular Skyway, a cable car that climbs vertically in a severe high-mountain environment to the foothills of Punta Helbronner (3,466 m), with its spectacular panoramic terrace. From here, you can ride the “eggs” of a second cable car, which traverses the 5-kilometer-long Giant Glacier to the Aiguille du Midi. Alternatively, for those with a spirit of adventure, take harness, crampons, rope, and ice axe to get your feet on the ice and walk up to the spire from Punta Helbronner. I did it with my wife and a trusted a mountain guide, our friend. It took us four hours, circumventing seracs and crossing crevasses, in a black-and-white fairy-tale landscape, but it was definitely worth it. Mountain Charts Things always look different from higher up.” (Clint Eastwood in “A Fistful Of Dollars.”) From an early age, height has attracted me. I have always liked to go high, which is why I love the Aosta Valley, which offers the possibility of ascents over 4,000 meters among rock, ice, and wind, in the silence of breathtaking scenery. It is beautiful to see the valleys and villages from above, everything is compressed and becomes so small in front of the majesty of the Alpine peaks. “The view from the top can be very lonely” sang Cat Stevens, but when I look at the mountain charts of my best-performing funds, I think it’s a splendid loneliness. A mountain chart is a financial graph with peaks and troughs that make it look like the side view of a mountain and represents the growth of an investment over time. It reminds me of the Alps and makes me think of how nice it is to see things from the top of stocks whose return grows over time along with their performance: Total Return and NAV mountain charts of the best funds like my beloved Aosta Valley peaks. Total Return Total Return is the amount of value an investor earns from a security over a specific period. For CEFs, it is calculated with respect to the price or NAV, i.e., the net value of assets. Therefore, it is a percentage measure reflecting the total performance of a fund, incorporating both capital gains and the effect of dividends reinvested over a specific period. Obviously, it is a quantitative measure. Thus, if the Total Return is positive, we risk deluding ourselves that we have bought a good fund: we have gained; therefore we are richer. Little does it matter if in the meantime that fund has lost 70 percent of its value because it paid us a distribution it could not afford, eating up the capital. The numbers tell us that the Total Return is positive, and we can run away with the loot (we know that if you torture the numbers long enough, they will confess to anything.) Net Asset Value (NAV) Net Asset Value (NAV) is the value of an investment fund, determined by subtracting liabilities from assets. The fund’s per-share NAV is then obtained by dividing NAV by the number of shares outstanding. Unlike Total Return, NAV performance over the long term takes on the appearance of not only a quantitative measure, but also, and more importantly, a qualitative indication of the performance and/or the management of the fund. It’s a bit like when we go to a bank to get an overdraft facility–I did this with my firm 30 years ago, and I remember well the difficulties we encountered with my partners. When we brought to the bank invoices issued to large and solvent companies, the manager would extend our overdraft, but when we brought invoices with the name of small customers, the manager would tell us that they were not sufficient collateral. They were always numbers and the total was positive, but that was not enough because they were not secured credits: so in that case, it was not only a question of quantity but mainly of quality. So much so, that when we closed the company, we had to pay debts. Dissonance between Total Return and NAV In my opinion, the same thing applies to investments: a positive Total Return is not necessarily synonymous with good quality. For this reason, as time has gone on, I have increasingly focused on selecting funds that, in addition to paying a distribution or dividend (which flows into the Total Return calculation), also grow in value over time, making that income freely usable. Recently, in Contrarian Outlook, I read this sentence about CEFs, which perfectly condenses my point of view: “CEFs compete on giving investors regular income they can use how they see fit.” Therein lies the point: how they see fit. As the liberal philosopher Benedetto Croce said, “freedom is freedom from need.” In my last article, I wrote that, in my opinion, for a dividend to be a “true” dividend, it must be self-sustaining. That is, the recipient must be able to dispose of it freely without having to worry about replenishing the initial capital to stay afloat (apart from protecting against inflation). This is only the case if a security’s NAV grows over time, showing that the distributions do not hinder its appreciation. Otherwise, it is not an investment but an amortization schedule. For securities, whose NAV shows a steady decline over the years, there is instead a dissonance between the Total Return, although positive, and the corresponding NAV, most often burdened by unsustainable dividend payments. As an example to highlight this dissonance, I chose these four funds, two of which are in my portfolio and two of which are not:  Eagle Point Credit Co (ECC) Oxford Lane Credit Corp. (OXLC) PIMCO Dynamic Income (PDI) XAI Octagon FR & Alt Income Term Trust (XFLT)  The first, ECC, records a Total Return of 124% with a NAV loss of almost 58% since launch in 2014. The total distribution rate according to Morningstar is 16.78% and is bought at a premium of almost 19%. To my eyes something does not add up, but evidently the gap between a moderately positive Total Return and a strongly negative NAV does not worry the market. Data by YCharts The second one, OXLC, records a Total Return around 206% with a NAV loss of more than 74% since launch in 2011. The total distribution rate according to Morningstar exceeds 20.00% and is bought at a premium of 11.25%. Again, something does not add up for me but evidently the gap between a positive Total Return and a disastrous NAV performance does not worry buyers, who are even willing to pay a premium to get it. Data by YCharts Since launch in 2012, PDI records a Total Return of 247% with a NAV loss of almost 28%. The total distribution rate according to Morningstar exceeds 13.50% and is bought at a premium of 12%. In this case, the gap between a positive Total Return and a moderately declining NAV seems to me significantly more acceptable, although the dissonance (and the premium) remains. Data by YCharts Lastly, XFLT records a Total Return of 55.50% with a NAV loss of 31.50% since launch in 2017. The total distribution rate according to Morningstar exceeds 14.50% and is bought at a premium of 3%. In this case, it seems to me that the game is not worth the candle because of the gap between a modest Total Return and a steady declining NAV. Data by YCharts All four of the examples just given (willingly, with the relative exception of PDI) lead me to wonder how one can focus only on Total Return while neglecting the very poor performance of NAV. It is true that, from a numerical point of view, a positive Total Return can attract our attention, but the fact that NAV continually falls is a huge red flag for me: that is, a quantitative measure turns into a qualitative assessment. In the method (Total Return) it all sounds nice and good, but in the substance (NAV performance), are we really sure everything is okay? Harmony between Total Return and NAV Instead, let’s now see an example of harmony between Total Return and NAV with four CEFs in my portfolio:  BlackRock Science and Technology Trust (BST) Eaton Vance Tax-Adv. Global Dividend Opps (ETO) Barings Corporate Investors (MCI) Reaves Utility Income Trust (UTG)  The first one, BST, records a total return of 282% with an increase in NAV of more than 88% since launch in 2014. The total distribution rate according to Morningstar is 8.94% and is bought at a discount of 6.5%. Clearly, something has to be given up, in this case a higher yield, but the track record of this fund resembles the profile of the Aosta Valley mountains and makes me think that distributions are not paid at the expense of NAV. Data by YCharts ETO records a Total Return of 586% with an increase in NAV of more 45.60% since launch in 2014. The total distribution rate according to Morningstar is 8.26%, and it is bought at a discount of 7.9%. The market seems to snub it, but those who want it buy on sale a fund with a very good Total Return, supported by a NAV in largely positive territory, evidently not penalized by dividend payments. Data by YCharts Since its launch in 1984, MCI has recorded an impressive Total Return of 439,200% (yes, four hundred thirty-nine thousand) with an increase in NAV of over 340%. The total distribution rate according to Morningstar is 8.79% and is bought at a premium of 8.2%. The graph speaks for itself: Total Return is not a mountainous profile but a rocket on takeoff, while NAV performance is a straight line showing no uncertainty. Data by YCharts Finally, UTG records a Total Return of 512% with NAV increase around 54% since launch in 2004. The total distribution rate according to Morningstar is 7.53% and is bought at a 2.78% premium. Clearly, even here one must give up a higher yield to still have a fund whose track record is largely positive, evidenced by a NAV not penalized by distributions. Data by YCharts All four examples show how the Total Return and NAV of each fund go hand in hand, creating wealth over the years that can be used in a thousand ways, starting with reinvesting dividends and ending with a bottle of wine. The charts tell us that to date distributions have not weighed on NAV performance, allowing investors to enjoy both income and capital gains. This, of course, does not mean that these funds have always done well, but their positive track record suggests that their management has not only been efficient but also effective, given the numerous and frequent moments of market turbulence since the turn of the century, all of which have been overcome with evident brilliance from a long-term perspective. My Overall Portfolio As you may know, my assets today include 28 securities (19 CEFs, 5 ETFs, 3 BDCs, 1 ETN) organized into three different portfolios: Cupolone Income Portfolio (named after Brunelleschi’s Florentine dome) consists of seventeen CEFs with monthly distributions:  BlackRock Science And Technology Trust (BST) Calamos Dynamic Convertible and Income (CCD) Calamos Global Total Return (CGO) Eaton Vance Enhanced Equity Income II (EOS) Eaton Vance Tax-Adv. Global Dividend Opps (ETO) Eaton Vance Tax-Adv. Dividend Income (EVT) Guggenheim Strategic Opportunities (GOF) John Hancock Tax-Adv. Dividend Income (HTD) PIMCO Corporate & Income Strategy (PCN) PIMCO Dynamic Income (PDI) John Hancock Premium Dividend (PDT) PIMCO Corporate & Income Opportunities (PTY) Cohen & Steers Quality Income Realty (RQI) Special Opportunities Fund (SPE) Cohen & Steers Infrastructure (UTF) Reaves Utility Income Trust (UTG) XAI Octagon FR & Alt Income Term Trust (XFLT)  Giotto Income Portfolio (named after the fourteenth-century Florentine painter and architect) includes five ETFs and one ETN with monthly distributions that adopt a covered-call strategy:  JPMorgan Equity Premium Income (JEPI) JPMorgan Nasdaq Equity Premium Income (JEPQ) Global X NASDAQ 100 Covered Call (QYLD) Global X Russell 2000 Covered Call (RYLD) Credit Suisse X Links Crude Oil Shares Covered Call ETNs (USOI) Global X S&P 500 Covered Call (XYLD)  Masaccio Income Portfolio (named after the founder of Renaissance painting) contains three BDCs and two CEFs with quarterly distributions:  Ares Capital (ARCC) Crescent Capital BDC (CCAP) Fidus Investment (FDUS) Barings Corporate Investors (MCI) Royce Value Trust (RVT)  Using the same criteria as in the previous comparisons, we now see the remaining 13 CEFs from two portfolios, Cupolone (with monthly distribution) and Masaccio (with quarterly distribution), grouped together below in alphabetical order. As for the three BDCs in Masaccio, the NAV is usually reported quarterly by the management houses, but there is no chart on the YCharts platform showing either the NAV Total Return or the NAV. Only the price trend, however, which is not needed. I will therefore limit my analysis to CEFs and ETFs only, plus the one ETN in my stable. The Remaining 13 CEFs Since the launch in 2015, CCD records a Total Return of 55.6% with NAV loss around 22%. The total distribution rate according to Morningstar is around 10%, but is bought at a huge premium of 27%. The gap between a very modest positive Total Return and a declining NAV does not seem to me to justify buying it at such a high premium. Data by YCharts Since the launch in 2005, CGO records a Total Return of 284% with NAV loss around 20%. The total distribution rate according to Morningstar is 8.25% and is bought at a 1.5% premium. In this case, the gap between a positive Total Return and a declining NAV seems to me more acceptable, although the dissonance remains. Data by YCharts Since launch in 2005, EOS has recorded a Total Return of 976.6% with NAV increase around 14%. The total distribution rate according to Morningstar is 8.87%, and it is bought at a discount of almost 4%. The market does not seem to pay too much attention to it, but those who want it buy at a small discount a fund with a remarkable Total Return, supported by a NAV in positive territory. Data by YCharts Since launch in 2003, EVT has recorded a Total Return of 607% with NAV increase of almost 38%. The total distribution rate according to Morningstar is 8.33% and is bought at a discount around 8%. The market seems to snub it, but those who want it buy on sale a fund with a hefty Total Return, supported by a NAV in positive territory, evidently not penalized by distributions. Data by YCharts Since launch in 2007, GOF has recorded a Total Return of 365.6% with a NAV loss of almost 37%. The total distribution rate according to Morningstar is above 14% and is bought at a premium of 27.50%. The spread between a decidedly positive Total Return and a steady declining NAV does not seem to me to justify buying at such an exaggerated premium. Data by YCharts Since launch in 2004, HTD has recorded a Total Return of 400% with a NAV increase of around 26%. The total distribution rate according to Morningstar is 7.53% and is bought at a discount of 8.50%. The market seems to snub it but those who want it buy on sale a fund with a good Total Return, supported by a NAV in positive territory, evidently not penalized by distributions. Data by YCharts Since launch in 2001, PCN has recorded a Total Return of almost 80% with NAV loss around 17.3%. The total distribution rate according to Morningstar is 9.85% but is bought at a premium of almost 16%. The gap between a barely positive Total Return and a moderately declining NAV does not seem to me to justify buying at such a high premium. Data by YCharts Since launching as early as 1989, PDT records a Total Return of as much as 1,190% with an increase in NAV of 20.75%. The total distribution rate according to Morningstar is 7.59%, and it is bought at a slight discount of 1.7%. The market does not seem to pay too much attention to it, but those who want it buy at a small discount acquire a fund with a remarkable Total Return, supported by a NAV steadily in positive territory. Data by YCharts Since launch in 2002, PTY has recorded a Total Return of as much as 1,100% with NAV loss around 19%. The total distribution rate according to Morningstar is 9.96% and is bought at a premium of over 23.50%. Of the three Pimco funds, this is definitely the best performing and, in this case, the gap between an extremely positive Total Return and a declining NAV seems to me, all in all, acceptable, although the dissonance remains (together with an exaggerated premium.) Data by YCharts Since launch in 2002, RQI records a Total Return of 597% with a NAV loss of a small 3.36%. The total distribution rate according to Morningstar is 7.00% and is bought at a discount of 2.70%. In this case, the gap between a decidedly positive Total Return and a slightly negative NAV seems to me all in all acceptable. Data by YCharts Since launch in 1998, RVT records a Total Return of 4,910% with an increase in NAV of more than 77%. The total distribution rate according to Morningstar is 7.65%, and it is bought at a discount of almost 11%. The market seems perhaps to snub it because of its investment sector (Small Blend), but those who want it buy at a small discount a fund with a spectacular Total Return, supported by a NAV in largely positive territory. Data by YCharts Since launch back in 1993, SPE has recorded a Total Return of 658.5% but with an increase in NAV of a modest 7.80%. The total distribution rate according to Morningstar is 8.51%, and it is bought at a discount of almost 17%. The market seems perhaps to snub it because of its investment sector (Tactical Allocation), but those who want it buy on sale a fund with a remarkable Total Return, supported by a NAV in positive territory anyway. Data by YCharts Since launch in 2004, UTF has recorded a Total Return of 495% with an increase in NAV of over 32%. The total distribution rate according to Morningstar is 7.33%, and it is bought just above par, at a premium of 0.40%. The market does not seem perhaps to like it much because of its modest yield, but those who want it buy on sale a stock with a good Total Return, supported by a NAV in positive territory, evidently not penalized by distributions. Data by YCharts The 5 ETFs and the ETN Below are the five ETFs and the one ETN in the portfolio that I call Giotto. ETFs shares can be created or redeemed, which typically keeps their value close to the NAV, so there are no discounts or premiums to pay upon purchase. Since its launch in 2020, JEPI has recorded a Total Return of 67.34% with an increase in NAV of 15%. The 12-Month Yield according to Morningstar is 7.02% for an ETF with over 34 billion in capitalization and a fairly positive performance. Data by YCharts Since launch in 2022, JEPQ has recorded a Total Return of 33% with NAV growth around 2.6%. The 12-Month Yield according to Morningstar is 9.20% for an ETF with 15.3 billion in capitalization and an overall positive performance. Data by YCharts Since launching in 2013, QYLD recorded a modest Total Return of 116.7% with a NAV loss of 31%. The 12-Month Yield according to Morningstar is 11.51% for an ETF with 7.7 billion in capitalization and steadily declining performance. Data by YCharts Since launch in 2019, RYLD records a derisory Total Return of 18.56% with a NAV loss of 36.6%. The 12-Month Yield according to Morningstar is 12.21% for an ETF with 1.4 billion capitalization and disastrous performance. Data by YCharts Since its launch in 2017, USOI records a negative Total Return of -20.37% accompanied by a NAV loss of 86.63%. The 12-Month Yield according to Morningstar is 18.06% (I have no idea if it also includes the meager August coupon) for an ETF with 357 million capitalization and a disastrous performance. For Italian tax purposes, it is the only security in my portfolio whose dividends (more properly coupons) allow me to offset past losses, but the recent drop in yields makes me think it might be more worthwhile to look for other instruments. Data by YCharts Since launch in 2013, XYLD records a Total Return of 122.3% with a NAV just above par (1.05%).The 12-Month Yield according to Morningstar is 9.26% for an ETF with 2.8 billion in capitalization and an all-around acceptable performance. Data by YCharts The Final Breath Don’t be trapped by dogma–which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice.” (Steve Jobs at Stanford University) Overlooking (or underestimating) the importance of Total Return is certainly frowned upon, but I would like to clarify this point before I am accused of “lese majeste.” I do not underestimate its importance; on the contrary, I extol its value even more by claiming that it is heavenly music when accompanied by positive NAV performance, as in a kind of elective affinity. I would go so far as to say that this should be the goal of every investor who consciously approaches securities such as CEFs, whose price may moreover quote at a discount to NAV, offering that margin of safety that is an added value in this environment as well. Inspired by Eisenhower’s matrix (a time management tool that helps organize and prioritize activities according to urgency and importance), I would group CEFs into four categories:  with positive NAV, purchasable at a discount with positive NAV, purchasable at a premium with negative NAV, purchasable at a discount with negative NAV, purchasable at a premium  The first is for me to buy, the second to evaluate, the third to be wary of, and the fourth to avoid. We are fortunate to have CEFs that have historically offered positive (or even high) Total Returns with a rising NAV. Why give up exploiting it and instead follow the crowd by chasing funds that are struggling in the quicksand of modest returns with a free-falling NAV, yet so in demand that they even quote at a premium?  Frankly, it escapes me how many investors, so to speak, prefer to breathe the polluted air of urban centers while they could fill their lungs with the pure, rarefied air of the Aiguille du Midi.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":3,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2466184710"}