A Volatile 9% Yielder Being Advertised As Offering “Relative Stability”
Worth A Long Look
Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.
It looks as if a market correction might be upon us. Lumber prices are still declining. Defensive equities, especially utilities, are strongly outperforming across the board. The S&P 500 is back below its 200-day moving average. High yield spreads have been rising. Conditions look as cautious now as they have at any point since at least since the regional banking crisis of this past spring. With the direction of the latest economic data confirming this change in sentiment, it might be a prudent time for investors to think about playing a little defense. Many people like to focus on return maximization in their portfolio. The next several months might be all about risk minimization instead.
With that in mind, the Putnam Master Intermediate Income Trust (PIM) might be worth a long look. Whereas many fixed income CEFs dive deep into lower-rated debt in order to deliver huge yields, PIM focuses more on the higher end of the credit risk spectrum. As you’re probably well aware, I believe that a credit event is very likely and may have already started. That makes pivoting towards higher quality fixed income that much more important.
Fund Background
PIM’s objective is to seek, with equal emphasis, high current income and relative stability of net asset value. It allocates assets to the U.S. investment-grade sector, high-yield sector, and international sector.
There are a few things I notice pretty quickly when diving into this fund. First, the term “relative stability of net asset value” is a little amorphous. We’ll break this down in a bit when I start looking at risk and volatility, but there’s little that’s relatively stable when you’re diving into mortgage-backed securities, high yield bonds and emerging markets debt. Second, this portfolio is heavily invested in “agency pass-through” securities, which is a fancy way of saying FNMA and GNMA.
You probably know how I feel about where the housing market is headed right now. Therefore, it’s safe to say that I’m not necessarily a fan of so much of this portfolio being devoted to various forms of mortgage-backed securities. These tend to turn very volatile when market risk rises and I believe we could very well be headed into one of those periods. The rest of the portfolio provides some nice diversification. High yielders will likely have a different risk/return profile, which helps even though they’ll likely be volatile themselves. Convertible and EM debt won’t necessarily be “safe” investments either. Again, this portfolio doesn’t look like anything promoting a “relative stability of net asset value”.
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