LOM Stable Income Fund Manager’s Report Q1 2017
By Bryan Dooley | April 11, 2017
Following completion of its fifth successful calendar year in 2016, the Stable Income Fund is once again off to a strong start in 2017. In Q1 2017, the Fund posted another strong quarter, exceeding both its benchmark and the Bloomberg Offshore Balanced Index. The Fund delivered a net total return of 4.37% over the period versus the benchmark of 4.23%, representing outperformance of 14 basis points.
On a rolling one-year basis, the Stable Income Fund generated a total return of 6.58% which also compares favorably to the benchmark return of 4.65%. The Fund’s total return includes a monthly dividend of 0.03 per unit, which translates into a current yield of 3.29% on the current NAV price.
During last November’s market slump, we increased our total equity allocation to approximately 40% of NAV and maintained this allocation going into the new year, thereby further participating in the extended post-election equity market rally. This strategic move helped minimize some of the initial fall out from rising longer term interest rates which negatively impacted the values of many of our individual preferred stock holdings.
Preferred stocks as an asset class sold off sharply into the first two weeks of March, just prior to the latest FOMC meeting when the Fed hiked rates for the second time in three months. We used this correction as an opportunity to add to some of our holdings which had begun to show attractive total return potential on both a yield-to-maturity and yield-to-call basis.
Now that preferred stocks and high-dividend paying equities have rallied back to the point where we see them fairly valued, we are focusing more on security-specific situations. For example, we significantly increased our weighting to Amtrust Financial Services preferreds after they announced a review of their financial statements for the past three years and delayed their 10K report. We have followed Amtrust for a long time and are in touch with the most informed Street analyst on the company. After extensive due diligence, we initiated a new position in one of the company’s preferred issues yielding more than eight percent at the time of purchase. Since then, we have been somewhat vindicated by a proper release of their financials which showed only negligible changes to their bottom line earnings. Both common and preferred shares rallied sharply on the news and we continue to hold our positions.