SCCE - Reviewing My Fixed Income Assets And Strategies

November, 20 2023 08:00 AM Sachem Capital Corp. 6.00% Notes due 2027

2023-11-20 08:00:00 ET

Summary

This article discusses our fixed income holdings and strategies across various accounts, including taxable accounts, IRAs, and a 401k.
The strategies include holding cash for emergency funds, managing interest-rate risk through laddered term preferreds and baby bonds, and taking on higher-risk assets for increased income.
Here I provide a detailed list of the fixed income assets held and the strategies they align with.
One positive in writing this article was it forced me to review my entire portfolio, resulting in selling off a position and starting a deep review of another.

Introduction

I decided to take a break from reviewing funds and preferred stocks and do a set of articles that review first my fixed income strategies and then my equity strategies, maybe alternative assets then. My desire is that these efforts will not only benefit readers but me also as I review my numerous holdings over multiple accounts held by me, my wife, or jointly.

Our lineup of accounts include:

3 taxable accounts: her’s and two joint accounts held at different brokers.
3 traditional IRAs: mine, her’s, and her inherited one
2 Roth IRAs: one each
1 401k with both pre-tax and Roth parts: mine
1 Health Reimbursement Account: mine
Treasury Direct Account: mine

The purpose of the fixed income assets varies in the different account types, as does the allocation within each account. The strategies include:

Emergency fund : It is suggested one holds easy-to-access, low-risk assets equal to 3-6 months of one’s income. Since we are both retired, drawing two Social Security checks and one pension check that combined almost covers our standard monthly expenses, holding cash in our joint account at Fidelity provides this.
IRA withdraws : Only the inherited IRA requires RMDs currently so having enough cash to prevent selling holdings is part of the reason for having income-generating assets there. Since we do QCDs in lieu of RMDs, transferring holdings is not permitted.
Limiting interest-rate risk : Across accounts, we have laddered term preferreds and baby bonds. By holding to maturity, I have high confidence in what their YTC or YTM will be. Short-duration funds are also useful to accomplish this strategy. Of course, staying too short exposes one to reinvestment risk, which is more likely when rates are elevated as today. The strength of the Issuer played into the asset being rated here versus #5.
No risk assets : These are some available: T-bills, CDs, a Stable Value Fund, and Money Market Funds. Until the FOMC started fighting inflation, these assets were yielding below inflation even as low as that was at the time. For might-need-tomorrow funds, investors are at the mercy of short-term interest rates.
Higher risk assets : Our low equity ratio (under 50%) permits taking some risk with our fixed income assets to generate more income or higher YTC/YTMs. For us, these are “junk bond” funds and bonds or preferreds with low ratings. I included my long duration funds here. I would include our mREITs and maybe our BDCs under this strategy, all of which I did not list.

As I list and define each asset held, I will note which of those strategies we hold that asset for. Some are held in multiple accounts to reduce the number of different assets to track, which is on the high side, though most are buy/hold assets.

Government Cash Reserve & Money Market Funds [1,2,4]

Cash in each Fidelity account is held in one of these fund types, all currently yielding near 5%. The taxable account at Morgan Stanley has cash in a low-yield fund: .01%.

US T-bills [4]

Due to the cash yield at Morgan Stanley, we hold a pair of six-month T-bills with maturity dates three months apart.

CDs [2, 4]

These are all brokered CDs, FDIC insured in various Fidelity accounts. With the belief rates could be peaking, maturities go out to 2028. Where RMDs are required, they mature within the next calendar year where we use QCDs in place of RMDs.

I-Bonds [4]

I have a small TreasuryDirect account that holds some bonds bought in 1993 and others added over the last few years.

Stable Value Fund [4]

Current rules limit the kinds of accounts that can hold an SVF. I use this asset as the bedrock of the conservative part of our allocation and the main reason I haven’t merged my 401k into the appropriate IRA type. The SVF is a series of 3–5-year contracts from insurance companies that guarantee a set rate of return. Current yield is near 2.5% and still slowly rising.

iShares 0-5 Year High Yield Corporate Bond ETF ( SHYG ) [3]

Long-run returns on HY versus IG bond funds are why I chose this ETF. Using a short maturity version should reduce the default risk as the portfolio turns over faster than one that invests in longer maturity bonds. This is the only fixed income fund in the Morgan Stanley account.

Nuveen Select Tax-Free Income Portfolio ( NXP ) [5]

This is a Closed-End Fund that does not employ any leverage. Unlike the following ETFs, they invest in investment-grade municipal bonds. The portfolio has an average rating of A+.

VanEck High Yield Muni ETF ( HYD ) [5]

This ETF invests in below investment-grade bonds that are exempt from Federal income tax. This ETF adds diversification amongst our fixed income bond holdings, but our marginal tax bracket endorses that decision. Risk is lower on the default scale compared to other ETFs we hold but has more interest-rate risk with its 18-year effective maturity.

VanEck Fallen Angel High Yield Bond ETF ( ANGL ) [5]

This ETF invests in bonds that have lost their investment-grade rating. This ETF has a history of outperforming ETFs that invest in bonds that were originally rated BB or lower. The 9.9-year effective maturity comes with more interest-rate risk than an ETF like SHYG.

Apollo Senior Floating Rate Fund ( AFT ) [3]

With all the previous funds mostly/entirely invested in fixed-rate bonds, AFT was added to hopefully perform better as rates were being pushed up by the FOMC. That has proven to be true over the last 1, 3, and 5-year periods. While being a CEF adds risk, the below 5-year effective maturity offsets that some. We bought in at a 12% NAV/Price discount which adds return potential, but not yet.

Fidelity Advisor Floating Rate High Income Fund No Load ( FFRHX ) [2,3]

This is the only mutual fund we own that is not invested in stocks. I like the fact it invests only in floating-rate debt and cannot use leverage as some other funds we own do. The focus on BB and lower-rated assets adds risk but enhances why it is held: yield.

Cohen & Steers Limited Duration Preferred and Income Fund, Inc ( LDP ) [3]

This CEF is one we have held since 2014. The fund primarily invests in floating-rate and fixed-to-floating-rate preferred securities, preferred securities, traditional preferred securities, hybrid-preferred securities, debt securities, and convertible securities. Its 3.2-year duration helps control the interest-rate risk.

PIMCO Access Income Fund ( PAXS ) [3]

This CEF was only months old when we added it to our lineup when the discount was deep for this fund. The fund primarily invests in corporate debt, mortgage-related and other asset-backed instruments, government and sovereign debt, taxable municipal bonds, and floating-rate income-producing securities with varying maturities.

Cohen & Steers REIT & Preferred Income Fund ( RNP ) [3]

The fund invests in the public equity and fixed income markets of the United States. It seeks to invest in the stocks of companies operating in the real estate sector including real estate investment trusts. For its fixed income portfolio, the fund typically invests in debt and preferred securities of companies operating across diversified sectors. This CEF straddles the line between equities and fixed income, where I have chosen to group my preferred stock holdings. That said, pure REIT funds are not listed.

The rest of the assets are preferreds or notes where the risk ordering is more open to interpretation. Many of the descriptions are based on Seeking Alpha information.

Morgan Stanley PFD A 1/1000 ( MS.PR.A ) [3]

I rated this as the lowest risk due to belief in Morgan Stanley. What I like about this floating-rate preferred is it has a 4% floor, which came in useful when the FOMC had rates in the basement.

Arlington Asset Investment Corp. 6.75% SR NT 25 ( AIC ) [3]

Arlington Asset ( AAIC ) currently invests primarily in mortgage-related and residential real estate and has elected to be taxed as a REIT. AIC is one of the four preferreds or notes AAIC has issued to fund its operations. In 2021, the Called one of their notes, which I take as a good indicator of financial strength.

Capital Southwest Corporation NT NT 28 ( CSWCZ ) [3]

Capital Southwest ( CSWC ) is a BDC that specializes in credit and private equity and venture capital investments in middle-market companies. This note is their only one and was issued last summer. The 2028 maturity date is one of the longer ones we hold.

Eagle Point Credit Company Inc. 6.6875% NT 28 ( ECCX ) & Eagle Point Credit Company Inc. NT CAL 29 ( ECCV ) [2,3]

Eagle Point Credit ( ECC ) invests equity and junior debt tranches of collateralized loan obligations consisting primarily of below investment grade U.S. senior secured loans. There is a third note and several preferreds available too. They already Called notes that were due in 2026 and 2027. ECCX is at risk of being Called, and 50% was in early 2022: ECCV currently is not callable.

Eagle Point Income Company Inc. CAL NT 26 ( EICA ) [3]

Eagle Point Income ( EIC ) invests primarily in junior debt tranches of CLOs. The CLOs that are primarily targeted are securitization vehicles that pool portfolios of primarily below investment grade U.S. senior secured loans. Eagle Point Credit Management serves as an investment adviser to EIC.

Rithm Capital Corp. 7% RT REST PFD D ( RITM.PR.D ) [3]

Rithm Capital operates as an investment manager that operates a vertically integrated mortgage platform and invests in real estate and related properties in the United States and Europe. The company provides capital and services to the real estate and financial services sectors. Its investment portfolio comprises mortgage servicing-related assets, residential securities and loans, and single-family rental loans. I picked this over the other preferred as its floating component is tied to the 5-Yr UST Note, not 3M SOFR.

Oxford Lane Capital Corp. 6.75% PF TRM 24 (OXLCM) &

Oxford Lane Capital 6.25% Preferred Shares Series 2027 (OXLCP) [3]

Oxford Lane Capital primarily invests in securitization vehicles which in turn invest in senior secured loans made to companies whose debt is rated below investment grade or is unrated. OXLCM matures on 6/30/24. Oxford Lane has Term preferreds out to 2029 and a 2031 Note to pick from if I choose to stay with them.

FTAI Aviation Ltd. 8.25% RED PFD C ( FTAIN ) [5]

FTAI Aviation Ltd. owns and acquires infrastructure and related equipment for the transportation of goods and people worldwide. It operates through two segments, Aviation Leasing and Aerospace Products. I heard about this preferred after a Seeking Alpha article. It added industry diversity to my FI ladder. It is callable in 2026.

PennyMac Mortgage Investment Trust 6.75% RED PFD C ( PMT.PR.C ) [5]

PennyMac Mortgage, as the name indicates, invests in various types of mortgage-backed securities and it operates through four segments: Credit Sensitive Strategies, Interest Rate Sensitive Strategies, Correspondent Production, and Corporate. Of the three preferreds available, it was the only one originally with a fixed coupon. PMT just issued a Note due in 2028 that I need to check out. We also hold common shares in this company.

Priority Income Fund 6.25% Series G Term Preferred Stock due 2026 ( PRIF.PR.G ), Priority Income Fund, Inc. 6.625 PFD SER F ( PRIF.PR.F ) & Priority Income Fund, Inc. CAL NT 28 ( PRIF.PR.J ) [2,3]

Priority Income Fund invests at least 80% of total assets in securitized pools of senior secured loans and/or investing in senior secured loans in the primary or secondary markets. Goals are to generate current income and, as a secondary objective. The Fund itself is not publicly traded. They have a long history of retiring and issuing new preferreds and Notes.

Sachem Capital Corp. NT 24 ( SACC ) & Sachem Capital Corp. CAL NT 27 ( SCCE ) [3]

Sachem Capital Corp. operates as a real estate finance company. The company is involved in the originating, underwriting, funding, servicing, and managing a portfolio of short-term loans secured by first mortgage liens on real property located primarily in Northeastern United States and Florida. It offers loans to real estate investors and owners to fund their acquisition, renovation, rehabilitation, development, and/or improvement of residential or commercial properties.

WESCO International, Inc. DP SH FXRT PFD A ( WCC.PR.A ) [3]

WESCO International, Inc. provides business-to-business distribution, logistics services, and supply chain solutions in the United States, Canada, and internationally. It operates through three segments: Electrical & Electronic Solutions, Communications & Security Solutions, and Utility and Broadband Solutions. The preferred was issued as part of the merger with Anixter International. Unlike many of the other preferreds/notes we own, this one has always sold above Par due to its 10.625% coupon. While it does not mature, odds are it will be called in mid-2026.

Stifel Financial Corp. 4.50% DEP PFD D ( SF.PR.D ) [3]

Stifel Financial Corp., a financial services and bank holding company, provides retail and institutional wealth management, and investment banking services to individual investors, corporations, municipalities, and institutions in the United States, the United Kingdom, the rest of Europe, and Canada. It operates in three segments: Global Wealth Management, Institutional Group, and Other.

B. Riley Financial, Inc. 6.375% RILYM 25 ( RILYM ), B. Riley Financial, Inc. SR NT 26 ( RILYK ) & B. Riley Financial, Inc. CAL NT 28 ( RILYZ ) [5]

B. Riley Financial provides financial services to corporate, institutional, and high net worth clients in North America, Australia, and Europe. The company operates through six segments: Capital Markets, Wealth Management, Financial Consulting, Auction and Liquidation, Communications, and Consumer. The stock is performing very poorly and 25% of the stock has been shorted. Exposure here requires a deeper review.

Terra Income Fund 6, Inc. Nt ( TFSA ) [5]

The Fund is a real estate credit-focused company that originates, structures, funds, and manages commercial real estate credit investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans, and preferred equity investments throughout the United States. The fund is not actively traded, only the Note is.

Terra Property Trust, Inc. CAL 26 ( TPTA ) [5]

Terra Property Trust, Inc. is a real estate credit-focused company that originates, structures, funds, and manages commercial real estate credit investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans, and preferred equity investments throughout the United States (our “targeted assets”). Our objective is to continue to provide attractive risk-adjusted returns to our stockholders, primarily through regular distributions. There are some relationship overlaps between the two Terra issues.

Portfolio strategy

My purpose with this article isn’t to say every investor needs to be executing each strategy mentioned nor using the methods I have chosen to use within each one. The purpose is to get every investor thinking about what their goals or needs are and developing the proper strategies to achieve those. One goal I achieved was completing a review of all the assets held for these strategies. That resulted in selling my Chicken Soup for the Soul Entertainment, Inc. 9.5% NT 25 ( CSSEN ) as things had deteriorated since my last article about this holding.

Some parts of the overall strategy of holding fixed income assets not covered yet are account location and asset-type considerations. Important points there include:

For the most part, the higher-yielding assets are in our retirement accounts. If the payments aren’t eligible for the 15% tax rate, placing it there makes sense also.
Based on their low correlation to stocks, adding fixed income assets should result in a smoother ride. That was a major reason the 60/40 and then age-based allocation were sold to investors. Recently, however, has shown that doesn’t work out every year.

Supporting articles

When describing our strategies, I mentioned some examples of what could be used to accomplish them. Instead of going into detail there, I thought listing useful article links here made more sense.

For avoiding or reducing future RMDs

Asset allocation/risk control

For further details see:

Reviewing My Fixed Income Assets And Strategies

Company Name:	Sachem Capital Corp. 6.00% Notes due 2027
Stock Symbol:	SCCE
Market:	NYSE

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