The below text is licensed to Covestor Ltd. (“Covestor”), by Dan Plettner. Such text may be disseminated only by Covestor. Dan Plettner invests and receives income for securities research, including “buy-side” research. Dan licenses his own real time trading data to Covestor Ltd. (“Covestor”). Covestor is a Registered Investment Advisor that uses Dan Plettner’s data to create the Core, Long Short Opportunistic, Tax Advantaged Income, and Taxable Income models for its clients. Dan’s words should not be misconstrued as investment advice.
In managing each of my uniquely styled accounts, I have to see the forest through the trees. And in blending my uniquely styled accounts together, I have to see the country around the forest. I am focused on long term performance. However, I’m not in that camp who claims short term performance to be irrelevant. In my eyes, the long term is the aggregate of all short terms.
Some environments justify more nimbleness than others. Further concentration in favored model holdings BML-G and OSM would come with increased concentration risk. At all times, it is important to be aware of my environment. If I am in a goldmine I want to look for gold. If I am in a cow field I want to watch where I step.
I recently acquired some Trust Preferreds perceived to have minimal call risk and principle upside among their peer group. Those I chose are guaranteed by JP Morgan (JPM-J), Wells Fargo (JWF), KeyCorp (KEY-A), and Fifth Third Bancorp (FTB-A). For liquidity and concentration purposes, I have avoided duplicating the same Trust Preferreds in the alternate Core style.
In the last month, I believe the prospect and risk of rising interest rates became less immediate. A well-reasoned upswing in volatility may further affect demand for fixed income assets. My specific choices of Trust Preferred Securities were influenced by credit risk and a desire to maximize the relationship between principal upside and call risk. I also anticipate that Trust Preferreds may become a more popular investing instrument if and when the Bush Tax Cuts expire.
Still, I continue to like Floating Preferreds, cognizant of what eventually may become an increasing interest rate environment. Bank of America (BML-G) and Goldman Sachs (GS-D) continue to be favorites. But in mindfulness of overall concentration risks and in effort to focus increasingly on short-selling Closed-End Fund opportunities, I am actually likely to sell some BML-G in the alternate Long/Short Opportunistic style. I have no control over anything that Covestor or its clients do, but I blend my alternate styles. What appears a significant transaction to one Covestor style bias model, can be merely a tweak to my overall portfolio positioning.
Floaters offer the opportunity of increased payments when LIBOR increases significantly which mitigates the interest-rate risk to which they are subject. In August, I added USB-H and MET-A. I also like SLM-B and ORH-B, but they each trade insufficient volume for this account.
Among Closed-End Funds, I added DHG which was also added in the alternate Core style. My dual style uses of precisely the same security may grow increasingly uncommon. I blend my own various styles in effort to smooth out my overall investment returns and concentration risk is always relevant. All other things being equal, I would consider not to own the exact same security in multiple styles. But in cases like DHG where I have a strong preference for a particular security, and comfort with volatility parameters, the merits of position duplication justify my risk, even when blending my own styles together myself. I did not take the decision to add DHG to multiple models lightly. I anticipate holding DHG to the conclusion of an Activism Thesis.
I believe that in the current environment, it is especially important to seek return prospects significantly warranting the perceived risk. The market’s sharp moves in each direction suggest to me that what are currently good opportunities may become exceptional. I am holding some cash with ambitious deployment intentions. I am open to take more positions in income generating Closed-End Funds, but I they don’t dominate my Taxable Income style at present. I did buy GRX-A in August. GRX-A is a New York Stock Exchange listed preferred issue of Gabelli Healthcare and Wellness (GRX). This is not an Auction Rate Preferred (“ARP”) Issue. I do not own any ARPs. I hope to contribute text to Covestor Live covering the different securities when time allows.
Looking at the Covestor Risk and Performance reports for August, I see myself as decidedly imperfect. I aspire to be my own greatest critic. By reflecting on myself I seek to continuously grow wiser. Nobody is ever the best they can be. In hindsight the last month appears to have been a very bad time to have mitigated interest rate to the extent I chose to do so. I am not content with my absolute performance over the last month because I had not anticipated the extent of rational concern as to a double dip recession. In an ideal world, I wish my allocation tweaks would always be perfectly timed.