November 3, 2023
Year End Investment Strategy Insights – Multi-Asset Income
With imperfect consistency, we try to give our clients a peak under the hood of each of our various strategies as we approach year-end. Our intent is to answer that pesky question; What are you doing with my money? Let’s dive in starting with Multi-Asset Income, our creation born in the depths of COVID in March of 2020.
Multi-Asset Income (aka MASS Income)
Before I get into it, let me state plainly that any performance numbers referenced in these discussions is based on internal data and the use of real tracking accounts held since inception of each strategy, net of any and all fees. Each clients’ true experience with any of our strategies is a function of timing of entry, additions, withdrawals, etc. This discussion is for educational purposes only with data believed to be accurate and true but unverified or audited by any third party at this time. We do not provide performance numbers in any public form outside of these strategy insights. Each of our clients is provided with 24/7 access to their accounts including true performance data generated quarterly from our third-party provider, Orion Advisory Services. I’ll leave it at that. On with the show.
MASS Income has done actually what we would expect in this type of environment. For comparison purposes, I’ll put the (unofficial) results up against several relevant benchmarks. These are total returns net of any and all fees. Let’s first look at losses since the tippy top on December 31, 2021, to Tuesday, October 31st, 2023.
MASS Income Strategy -20.22%
US 20 Year Treasury Bond (TLT) -40.85%
Lehman Ishares Aggregate Bond (AGG) -15.27%
*Vanguard REIT Index (VNQ) -32.78%
*The Vanguard REIT index (VNQ), has the highest correlation to our MASS Income strategy just for reference.
Cold comfort I know because I have the majority of my personal investment net worth in the MASS Income strategy. On the upside, the strategy has delivered an average annual total return since inception of 6.10%/ year including recent losses. Not great but not terrible.
Let me back up the tape as to why we created MASS Income in March of 2020 and talk through the design, intended purpose, and perceived benefits to investors.
Why MASS Income? Why Now?
MASS Income was designed to offer our clients a high dividend alternative to Treasury bonds and pure common stocks which at the time paid next to nothing in dividend yield or interest and carried historically high valuations. Effectively we wanted to build a strategy that had strong total return ingredients with low correlation to both stocks and Treasury bonds. Treasury bonds in March of 2020 were perhaps the least attractive asset class on a fundamental basis of any investible security in the world. US Stocks were, and are still, unattractive from a valuation basis and continue to pay historically low dividends in the aggregate. MASS Income, by design is oriented toward hybrid type securities that offered both growth and high dividends without relying on Stocks or Treasury bonds. These hybrids include the relatively unknown and misunderstood worlds of preferred securities, closed end funds, High Income ETFS, mortgage REITs, equity REITS, CLO’s, Master limited partnerships, Business Development Companies (BDC), secure lending and credit funds.
Our view of economic conditions back in March of 2020 was simple and clear; Inflation was coming fast, and we wanted to offer something that would generate income above rising inflation rates. We wanted to take advantage of a side of the security’s market that could even benefit from higher rates. Imagine a security that sits on the lending side of the table during a period of rising rates. These securities generate higher cash flows with inflation, as they are able to charge borrowers higher and higher rates. These are BDCs, secure lending and bank loan funds and they have all performed as expected – up and to the right! REITS and preferred securities on the other hand have been smashed during the Fed’s relentless fight against inflation with 11 rate hikes.
In sum, the design of MASS Income is to offer a fully diversified portfolio of securities that generates 7-9% in annual dividend income across 35-45 different securities. We intend to stay fully invested in all markets and price action of the underlying securities is really a secondary concern to consistent dependable income generation. We describe the strategy as a winning alternative to owning real rental or income properties. MASS Income will generate higher annual dividends, plus growth potential, 100% liquidity of capital with 24 hours’ notice and no transaction costs. Compare that to buying a rental property now at today’s prices and borrowing rates with a 6% commission + your time + taxes + tenants + toilets!
When we started MASS Income in March of 2020, the dividend yield was just over 6%. Today, MASS Income is generating an estimated annual yield (Dividends and Income) of 9.25% with the vast majority paid monthly. Wow. Read that again if you need to. After nearly three years, we also observe that 40% of total income is received as qualified dividends, taxable at long term capital gains rates.
In March of 2020, I messaged to all that we would never see mortgage rates at then current levels again, in our lifetimes. Mortgage rates then were near 2.5% for a 30-year fixed rate. I will tell you with high confidence that you will never see an entire portfolio of securities generate an aggregate yield approaching 10% again in your lifetime. Seriously, not in your lifetime. At the same time, we are now seeing the prices of the underlying securities in the portfolio trading at discounts to par, down 25-40% from the highs in 2021. Now that the Federal Reserve has completed their rate hiking cycle, we are already seeing prices jump. MASS Income is our best performing strategy in our entire line up, over the last two weeks, as smart investors snatch up these discounts in sync with the Federal Reserve’s new pivot in monetary policy.
I am shamelessly recommending that any of our clients hold and continue adding to the MASS Income strategy now, as a means of generating dividends far above inflation with real potential for price improvement from these depressed levels. This is a true buy the dip opportunity. High earners beware, this is not a tax efficient investment strategy and best applied with qualified retirement funds.
Next up… The New Power strategy.
Until next week.
Sam Jones
