My 9.6% Cupolone Income Portfolio – Buying The Dips

“Ring the Bells That Still Can Ring”

As you know, I live in Tuscany, south of the Appenines and many miles from Lombardy, where the pandemic Apocalypse is now the measure of everyday life. So, while writing these lines, I cannot exempt myself from thinking of how, in less than one month, the coronavirus has changed our lives. So far, the community where I live is lucky, but we have no merit in this; it’s just a matter of luck.

I saw Leonard Cohen at the Lucca Summer Festival, in Tuscany, on July 9, 2013, and it was one of the most exciting evenings in my life. He sang many of his best-known songs and the audience, filling a whole square in that medieval jewel town, accompanied him devotedly in his last Italian tour. I get chills remembering him intoning the precious leitmotiv of “Anthem”: “There is a crack, a crack in everything. That’s how the light gets in.” There will be a crack in this situation too, and the light will again get in.

There are two perspectives in the coronavirus event: the human perspective, filled with empathy for people suffering around the world and not only in Italy, and the investor’s perspective. I don’t want to mix them while writing about my new Cupolone Income Portfolio.

Buying on the Dip

I began to build my new Cupolone Income Portfolio at the end of February this year and kept working on it in baby steps up until March 20th. During this time I held on through the two big market dips in mid-March. I took advantage of every fund’s dip, especially on the day some of them went down more than 25% day on day.

In an illuminating March 13, 2020 article, “Stocks Are in Chaos. Control the One Thing You Can” (from “The Intelligent Investor” column for “The Wall Street Journal”), Jason Zweig wrote:

Investors are full of false bravado. It’s a cinch to say you’ll buy more stocks if the market goes down 10%. It isn’t even that hard not just to say it but to do it—a few times. Buying the dips is almost fun when the market goes down a little bit every once in a while. But when stocks go down 7% or more in a day twice in a single week, the person you thought you were last Friday isn’t the person you are this weekend.”

Even though I had planned my investing strategy in detail since last autumn, when I got punched in the mouth by the market correction and the subsequently abrupt bear market, I lived for some weeks asking myself “can I keep buying?”

The drastic market decline was actually offering me the opportunity to increase the number of funds in my portfolio while buying them at lower prices, and that’s all I wanted. Period. No more questions, I just needed to take action.

So I decided not to think. I decided not to fear. I just decided to press the ENTER button when I had the chance to dollar-cost average my position. That’s all.

Maybe I began too soon, but nobody knows when it’s the right time to catch a falling knife. Sophisticated analysts may think they know, but I am not one of them. I threw the dice and dived.

Taking a Hit

The CEFs in my new Cupolone Income Portfolio are:

  • BlackRock Health Sciences Trust (BME)
  • DoubleLine Income Solutions (DSL)
  • Eaton Vance Tax-Adv. Global Dividend Opps (ETO)
  • Eaton Vance Tax-Adv. Dividend Income (EVT)
  • Guggenheim Credit Allocation (GGM)
  • John Hancock Tax-Adv. Dividend Income (HTD)
  • Pimco Corporate & Income Strategy (PCN)
  • Pimco Dynamic Income (PDI)
  • John Hancock Premium Dividend (PDT)
  • Pimco Income Opportunity (PKO)
  • Pimco Corporate & Income Opportunities (PTY)
  • Cohen & Steers REIT & Preferred Income (RNP)
  • Cohen & Steers Quality Income Realty (RQI)
  • Cohen & Steers Infrastructure (UTF)
  • Reaves Utility Income Trust (UTG)

As always, I based my decisions on Morningstar star rating and RiskGrades. Starting from there I shaped the portfolio to take into account the current circumstances.

The following table compares RiskGrades at the beginning of February, when I planned my new Cupolone Income Portfolio, with those for March 25th. As you can see, values have changed significantly in last two months as a result of the end of the decennial bull market and the arrival of a bear market.

(Source: Morningstar, RiskMetrics)

DSL and UTG have recently been downgraded from a five-star Morningstar rating to four stars, PDT went from four stars to three, and EVT went from five stars to three. RNP has been upgraded from four stars to five.

I admit I didn’t make decisions for rebalancing my portfolio on the fly, otherwise I risked losing focus on my goals. I remained determined to stick to my original plan and stayed the course during the storm. That has not been easy, but it would have been impossible if I tried to base all of my decisions on the fluid values of the RiskGrades.

The terrifying two weeks of sell-offs were followed by a two-day recovery, which was furious in some cases (PDT, for example). That turmoil was reflected also on discount/premium ratios for the CEFs in my portfolio: the following table compares the February discount/premium relationship for all of the funds in my Cupolone Income Portfolio with that from March 26.

(Source: Morningstar)

Note the following from the preceding table:

  • Although there was a short dip in the discount field during the central weeks of March, all the Pimco funds—PCN, PDI, PKO and PTY—have returned to significant premiums, even if they’re not as jumbo as two months ago (Pimco funds rarely quote at discount).
  • BME, GGM and UTG show a slight premium.
  • Of the two John Hancock funds, PDT quotes at premium while HTD at discount.
  • DSL and the two Eaton Vance CEFs (ETO and EVT) show a slight discount.
  • The three Cohen & Steers funds (RNP, RQI, and UTF) still quote at good discounts.

Rebalancing the Cupolone Income Portfolio Lineup

The following table shows the lineup for the funds in my Cupolone Income Portfolio after rebalancing.

Previously, GGM made up 25.99% of my portfolio; I reduced that position to 8.32% today. I also proportionally reduced my positions in both BME and UTG, even though they have shown superb performances in the long run.

To make up the difference, I decided to emphasize all of the fixed-income Pimco funds in my portfolio, both for their indisputable quality and for the circumstance that they sold at discount (as discussed above). Their high distribution rates also played their part in my decision. In addition, I more than doubled my position in DSL, a CEF I have owned with satisfaction for five years. I also made slight increases to my positions in the REIT funds, RNP and RQI, choosing caution in the face of the possible consequences of a recession in real estate.

The following table compares the load prices when I began to shape my new Cupolone Income Portfolio at the end of February with those on March 26th.

The small portfolio I built during the last week of February anticipated an income yield of 8.45%; the overall anticipated yield today is 9.62% (assuming there will be no dividend cuts).

Maybe I will take more action, we’ll see. Given the current load prices, I’m down about 10%, but I know how to wait…

Anyway, I hope we will soon get back to a major calm.

What About My Old Funds?

As you know, in recent months and weeks I cleared all of my positions in Eagle Point Credit Company (ECC), Guggenheim Strategic Opportunities (GOF) and NexPoint Strategic Opportunities (NHF). While I am still monitoring GOF for future developments on the dividend side, my interest in ECC and NHF completely vanished when I saw their prices (and discounts on NAV) sink as they did ten days ago, resulting in unsustainable distribution rates. In fact, NHF promptly halved its dividend to 0.10, while ECC today has a 32% distribution rate. For me those were not buying signals, so I adopted the motto “Whenyou’re gone, you stay gone, or you be gone.” (Marsellus Wallace in “Pulp Fiction”).

Bottom Line

The steep rebound during the beginning of the March 25th week helped recover some of the losses from the two-week sell-off. Will the rebound last? And if so, how long will it last? Of course I don’t know. Maybe it’s the classical dead cat bounce, even if it seems to be a full-bodied one, but who knows? The market could still go down 10%, 20%, or even 30% again. At this point I hope not.

I am still convinced that the conclusions I reached in my personal analysis of the closed-end fund world —as I described in some of my recent articles, “Comparing Morningstar Ratings And Total Returns,” “A New Year’s Resolution For 2020,” and “Living With Price Swings”— are correct and that building my new (almost 10%) Cupolone Income Portfolio based on those conclusions was a sound decision. Perhaps I could have had more courage when prices yawned into the abyss, but I can’t complain about the 9.62% yield I have obtained so far – at least on paper.

How it all turns out probably depends on how soon we see the light at the end of the tunnel. I can hardly wait for the moment the light will get in!

Disclosure: I am/we are long BME, DSL, ETO, EVT, GGM, HTD, PCN, PDI, PDT, PKO, PTY, RNP, RQI, UTF, UTG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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