Disclaimer: Dan owns RQI, SLS, IDE and DRP in his Covestor Taxable Income model.
October 6, 2010: 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, Taxable Income, and MLP Direct Ownership models for its clients. Dan’s words should not be misconstrued as investment advice.
On a personal note, I enjoyed the Covestor webinar. Since leaving Wall Street, I’ve loved the personal autonomy. My speech on Closed-End Funds was never so liberated, even when communicating with Financial Advisors. I will continue to make myself available to Covestor for any follow up questions.
In September I here added a Cohen and Steers Closed-End Fund which was subject to a distribution increase, RQI. Similar to a prior holding, SLS, which was discussed in the webinar, RQI allows me to diversify my portfolio so as to include categories of exposure to income assets whose income can be dynamic. There are risks in everything of course, but I want to pick and choose which risks I accept in what proportions, rather than embracing peak interest rate risk in all Taxable Income style holdings.
Covestor’s September performance report was frustrating, and likely related to the risk report showing a beta of only 0.25. The top performers were a closed end fund (IDE) which returned 16.1% and has also been owned in the Core model, and DRP, a DWS fund which returned 12.98% and has been the subject of an Activism Campaign. Some of the most conservative holdings contributed negative performance in a September Market that embraced risk assets and I believe another big reason for frustrating performance was cash allocation.
IDE is a situation where among decent yield securities (irregardless of taxation), I have expectations of an increasing taste for its type of yield (largely covered call revenue), and thus favorable expectations for its relative valuation. I view the possible expiration of, or changes to the Bush Tax Cuts as a potential catalyst. That prospective catalyst influences many of my allocations here, including allocation to Trust Preferreds which do not currently enjoy any taxation advantage. In the case of Trust Preferreds, I am attempting to choose taxable income instruments believed less likely than similar instruments to have their after tax yield worsen significantly. Thus, the top down thesis is one of changing relative attractiveness.
Big picture, my thematic allocation assessment may be displayed in activity within other styles such as the MLP focused model. Instruments essential in those styles often avoid traditional dividend taxes. Contrasting those tax-interested strategies in September, performance was better in MLPs, likely related to the positive beta. Of course, there are risks in every asset class.
