Holding Steady through Short-Term Market Turbulence

Markets continue to have trouble establishing trends in 2018 as investors respond to contradictory short-term events.

Commodities recently took a break from their extended rally. iShares Commodities Select Strategy (COMT) is down 3.04% over the last four weeks and 3.70% over three months. The fund now is up only 5.13% for the year to date. Its 12-month return still is 20.24%, thanks to the strong rally that peaked in late May.

Normally, commodity prices boom in the late stage of the business cycle, which we are in. A couple of factors stalled the rally. One was the dollar’s surge since late April, which diminished the demand for commodities.

More important are investor concerns about China and trade conflicts. Investors seem to have decided that the major trade conflict is between the United States and China, and that, at least in the short-term, China is losing. There have been sharp declines in China’s stocks and currency this year. The commodities that declined the most are those for which China has outsized demand, such as soybeans and copper.

Another factor in lower commodity prices is that oil prices are down from their peaks, because more supply came on to the market.

We’ll continue to hold the fund because U.S. economic growth is solid and we’re still in the late stage of the economic cycle. If I see signs that the recent decline might be long lasting, then we’ll sell.

Gold followed other commodities down for most of the same reasons. We have a loss of 3.57% in the last four weeks and 7.19% for the year to date in iShares Gold Trust (IAU). We own the fund as a hedge against inflation and geopolitical crises. I think it’s still a good position to have in our portfolios.

Real estate investment trusts (REITs) have been in a trading range the last couple of months, but the intermediate-term rally seems to be intact. Cohen & Steers Realty Shares (CSRSX) declined 0.95% over the last four weeks but is up 1.75% for the year to date. It’s also up 4.57% over the last three months.

Commercial real estate has both strong and weak sectors these days. That’s one reason I like CSRSX. The fund focuses on the REITs management likes best. The fund owns 47 securities, and about 44% of the fund is in the 10 largest positions.

The fund develops an economic outlook and identifies the real estate sectors and regions of the country that are likely to do best in that environment. Then, fund management buys REITs concentrated in those sectors and regions. It looks for high-quality properties and management and reasonable prices.

Top REITs in the fund recently were Essex Property Trust, UDR, Prologis, Equinix and Extra Space Storage. The top sectors were offices, apartments, data centers, health care and hotels.

A related investment is Cohen & Steers REIT & Preferred Income (RNP). This closed-end fund is a roughly equal mixture of REITs and preferred securities. The preferreds increase the income and reduce some of the volatility of a REIT-only fund.

Like other funds with REITs, this closedend fund had a rough patch in 2017 and early 2018. The discount to net asset value increased to over 11%. It now is 10.63%. So, we’re able to buy quality REITs and preferreds at a substantial discount.

The fund uses leverage of around 25% to boost the yield and total return. It returned 0.08% in the last month and 6.17% over three months. It’s still down 4.02% for the year to date.

The distribution yield is 7.62%. In some years, a portion of the distributions is a return of capital, and it’s returned some capital in 2018.

Our diversified stock positions continue to deliver steady returns with a margin of safety.

WCM Focused International Growth (WCMRX) declined 1.16% over the last four weeks but is up 3.12% for the year to date. Over 12 months it returned 11.73%.

This fund is a very selective and focused long-term investor. It looks for companies with high growth rates and that are likely to sustain that growth for some time. Companies should have little or no debt and management that establishes a culture oriented toward long-term growth. Companies also should offer unique products and services with barriers to or advantages over competition.

Top stock positions were Keyence, CSL, LVMH Moet Hennessy Louis Vuitton, Accenture and Canadian Pacific Railway. Top sectors in the fund are technology (21.5%), consumer cyclical (20.2%) and industrials (15.7%).

Leuthold Core Investment (LCORX) is a tactical asset allocation fund that shifts the portfolio among global stock and bonds, commodities and cash. It also can hedge against stock declines. The default position of the fund is to be invested primarily in U.S. stocks, but it changes positions based on technical and proprietary indicators of valuations and the markets.

The fund started 2018 with a high U.S. stock allocation of around 67% but quickly pared that below 50% as stocks declined in January and early February. Recently, the fund was 53% invested in U.S. equities, but about 14% of the fund was hedged against stock declines. So, on a net basis, the fund was about 43% allocated to U.S. stocks with modest positions in overseas stocks.

The stock positions also were value-oriented, so the fund wasn’t invested in the high-priced stocks that led the indexes higher. About 20% of the fund is in bonds, which historically is among its lowest allocations.

The focus on value and a margin of safety has given the fund modest returns. It’s up 0.88% over four weeks and 0.69% for the year to date.

Another closed-end fund in the portfolios is Cohen & Steers Infrastructure (UTF). We added the fund after it took a tumble in the first quarter of the year. It’s up 1.70% over four weeks and 6.46% over three months. The year-to-date return is only 1.72%. The discount to net asset value is 4.63%, and the fund uses about 29% leverage. The distribution yield recently was 7.73%.

As the name implies, the fund invests in infrastructure companies around the globe. These can include utilities, toll road companies, airports, pipelines, railroads, telecommunications and more. The fund recently was invested about 56% in U.S. stocks and the rest in stocks outside the United States. The largest positions outside of the United States were Canada and Japan.

Top holdings recently were NextEra Energy, Crown Castle International, Enbridge, American Tower and Union Pacific. Top sectors were regulated electric utilities, pipeline companies, integrated electric utilities, cell phone tower companies and freight railroads.

A staple of all our portfolios is DoubleLine Floating Rate (DBFRX). We reduced the positions last month partly because I believed there were better opportunities and partly because floating-rate debt has become very popular, so prices appeared to be stretched. We still have modest positions for diversification.

The fund buys primarily loans with floating interest rates instead of fixed rates, so it isn’t likely to be hurt by rising rates. The loans usually are purchased from the banks that issued them and are known as bank loans or leveraged loans. The debtors on the loans tend to have lower credit ratings, so there could be problems in an economic downturn.

The fund is up 0.60% in the last month and 2.39% for the year to date. Its yield is 4.94%.

Those are the holdings of the Sector and Balanced portfolios. The Income Growth portfolio has those positions and also owns JPMorgan Alerian MLP, which is discussed in the Retirement Paycheck section below.

RETIREMENT PAYCHECK

We made changes last month in the Retirement Paycheck portfolio to increase our yield and diversification, as well as take advantage of several opportunities in the markets.

In this portfolio, we seek above-average yields for income investors by venturing outside traditional safe retirement income investments. Holdings in the portfolio might include preferred stock, high-yield bonds, closed-end funds, master limited partnerships and more.

We don’t buy and hold positions, because these assets can be as volatile as stocks. We add positions when they seem to be attractively valued and sell when prices are too high.

This portfolio holds several positions we already discussed: DoubleLine Floating Rate, iShares Commodities Select Strategy, Cohen & Steers Infrastructure and Cohen & Steers REIT & Preferred Income.

There’s been a strong turnaround in JPMorgan Alerian MLP (AMJ). This exchange-traded note promises to pay investors the return of an index of the 50 largest master limited partnerships (MLPs) by capitalization, plus periodic income distributions.

The ETN had a tough time from early 2017 until recently, due primarily to restructuring in the MLP industry. But the turmoil seems to be in the past, and the investment’s been recovering.

AMJ is up 11.54% in the last four weeks and 11.16% for the year to date. The 12-month return now is positive at 10.87%, with a yield of 6.73%.

I don’t expect returns to continue at this rate, but the ETN should give us a nice yield and some steady appreciation for a while. I continue to monitor the MLP industry for signs of more turmoil.

We added the closed-end fund Reaves Utility Income (UTG) last month and the fund already has paid off with a 5.60% return in just four weeks. The fund is up 12.02% in three months and 3.36% for the year to date. You can tell from the data that the fund tumbled most of 2017 and the first half of 2018. We saw value and purchased.

The team managing the fund has been focused on utility stocks for decades. It seeks tax-advantaged dividend income, plus appreciation. The fund uses leverage, with a recent leverage ratio around 17%.

The fund can be invested up to 20% in securities other than utilities, but 80% or more of the fund will be invested in utility securities.

Not all of the recent appreciation is due to good investments by the fund. The share price of the fund increased more than its net asset value. The discount to net asset value was 9.04% when I recommended it last month, and the six-month average discount is 8.03%. But the most recent discount was 4.63%. I’ll be watching the discount closely to see if investors push the share price to an unrealistic level. For a brief period in 2017, the fund solid at a premium to net asset value before falling.

The recent distribution yield was 6.61%. All distributions to date have been from income or gains; none were return of capital. The fund has a history of increasing dividends most years.

We’ve seen the discount to net asset value increase in Cohen & Steers Limited Duration Preferred & Income (LDP).

This closed-end fund’s share price is down 0.58% over the last four weeks. But the net asset value of the fund increased 0.61%. Over the last three months, the share price is down 1.16%, while the net asset value is down only 0.12%. For the year to date, the fund is down 0.36% and the net asset value is down 1.30%. The current discount to net asset value is 3.23%, while it was only 1.91% when I recommended it last month. That makes the fund a better value now.

LDP invests in preferred securities with a mandate to keep the duration of the fund low so that it won’t be hurt much by rising interest rates. The fund also doesn’t try to mimic an index and invests globally.

Many of the securities purchased by the fund qualify for the lower income tax rate on qualified dividends, which enhances the after-tax rate for investors. The leverage ratio of the fund is about 30%.

The distribution yield is 7.52%. Sometimes distributions are a return of capital, and it’s made some return of capital distributions in 2018.

The portfolio also holds three high-yielding stocks: IBM (IBM), AT&T (T) and Verizon (VZ). They continue to have mixed results

IBM yields 4.35%. The stock price bounced up and down over the last year but appears to be in rally mode. IBM is up 0.93% in the last four weeks and 1.25% over three months. For the year to date, it’s still down 2.80%.

AT&T is yielding 6.20%. It’s stock had a tough time in the first half of 2018 as investors worried about the proposed merger with TimeWarner and saw subscriber losses in the DirectTV operation. The stock is down 0.74% in the last month but is up 2.76% over three months. It’s still down 13.17% for the year to date.

Verizon’s had the best return of the group in addition to its 4.50% yield. The stock is up 2.20% for the last four weeks, 12.42% over three months and 2.47% for the year to date.

TRUE DIVERSIFICATION

We continue to earn steady, solid returns in the True Diversification portfolio

This is our long-term, buy-and-hold strategy. Unlike traditional buy-and-hold portfolios, it isn’t closely tied to the returns and volatility of the major stock indexes.

Instead, most of the funds in the portfolio have low correlations with the major indexes and with each other. As you can see from the table nearby, at any time some funds are doing well and others aren’t. But when the funds are combined, the portfolio delivers high long-term returns with about half the volatility of the S&P 500.

We have a detailed discussion of the portfolio every few months, with the next one coming up soon.

INVEST WITH THE WINNERS

This portfolio will remain invested in Invesco QQQ (QQQ) (formerly Powershares QQQ Trust). The ETF has been hitting new all-time highs. The returns are 1.80% over one month, 6.65% over three months and 16.34% for the year to date. The models I use continue to select this as the one ETF with high returns that is likely to sustain those gains.