Since its inception in July 2011, the Stable High Yield portfolio has outperformed the Barclays U.S. Aggregate Bond Index by a margin of 4.7% to 3.5% on an annualized basis, as of June 22, 2014. This has occurred in spite of the dramatic decline a year ago in the value of mortgage real estate investment trusts (mREITs), which comprised a significant percentage of the portfolio until the third quarter of 2013.
More recent performance comparisons favor the index, largely due to the lingering effect of last year’s mREIT decline, but also because of a deliberate commitment to keep the average duration, i.e., the portfolio’s sensitivity to interest-rate changes, very short. If this continues to cause 30-day or 90-day performance to lag the index for a while longer, so be it. I am interested, first, in preservation of capital.
Popular opinion holds that interest rates will stay at rock bottom levels for an extended period of time, but I am persuaded that an unexpected rise in rates is the overarching risk for bond portfolios at the present time. It’s going to happen sometime, and it appears that complacency, a contrary indicator, has firmly taken hold. The time to prepare a portfolio for rising rates is before it begins to happen.
That said, in my opinion, the short-duration securities that I have invested in offer better yields in comparison to securities with comparable short durations. Based on an annualization of their most recent dividend distributions, the PowerShares Senior Loan Portfolio (BKLN) yields 3.9%, the Guggenheim BulletShares 2014 High Yield Corporate Bond ETF (BSJE) yields 2.15%, and the Guggenheim BulletShares 2015 High Yield Corporate Bond ETF (BSJF) yields 3.4%. All three components of the portfolio have higher-than-average credit risk, but I find their short durations to adequately offset it.
Should a security be found that might boost the average yield a bit, without significantly altering the average duration of the portfolio, it could be added.
DISCLAIMER: The investments discussed are held in client accounts as of May 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
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