November 15, 2016
We are having a good year. Just today, we got another slew of dividends. It’s fun seeing those dollars rolling in.
A bunch of positions have been sold over the last month, most at a profit, and they have been gutted by increasing rates. So we got out before the damage hit.
Yes the Corporate Bonds have been hit (paper losses) but we are holding to maturity at which time we get our money back….including the dividends. We did sell two with very big profits.
There is now a huge cash position in the Core Portfolio and it can be put to work.
The markets have started to settle down and we are ready to place some bets on new positions. No we are not buying the stock market as we have seen nothing but a huge short covering rally. We feel the rising prices are premature: Trump doesn’t even take office for months. There is potential for a pull=back in the coming weeks at which time you might want to consider buying stocks.
So, what are we looking at: Business Development Companies.
GSBD Goldman Sachs BDC Paying 8%
BDCS UBS Wells Fargo ETN Business Development Companies Paying 8%
Here is a description from seekingalpha.com
Our view was based on several factors:
- Dirt cheap sector valuations (both in historical and relative terms).
- Large banks continue to be unwilling to lend to medium and small businesses. This has created a unique opportunity for BDCs to fill this space and to grow their portfolios and their earnings.
- BDCs provide investors with a pure exposure to the U.S. economy, which is one of the best performing economies in the world today. A BDC company makes its money by lending to U.S. medium and small businesses. The BDC sector is poised to greatly benefit from improvement in the broader U.S. economy as medium and small businesses are set to perform better. As investor confidence is rising for the creditworthiness of small-to-medium-sized businesses, capital flows into this space will help lift stock valuations. I believe that companies with a pure exposure to the USA will outperform as global investors flock to US equities for a “safe haven.”
- Improving outlook of the U.S. economy will reduce loan defaults. Higher energy prices will reduce loan defaults, as many BDCs have some exposure to this sector.
- While the BDC sector underperforms during periods of declining interest rates, it is particularly attractive during periods of stable or rising interest rates due to the fact that the majority of their investments consist of floating rate loans, which are primarily funded with fixed-rate term debt. This makes BDC loan portfolios better positioned for rising interest rates when compared to the majority of high yield products.
- The high-dividends paid by this sector at the time were at historical highs, and are still particularly generous and attractive to income investors in the current low interest rate environment..