LOM Stable Income Fund Manager’s Report Q2 2017
By Bryan Dooley | July 19, 2017
For Q2 2017 the LOM Stable Income Fund ended a positive quarter despite an uptick in interest rates which caused a sell off in longer duration fixed income securities at the end of the June. In this time of gradually rising short term interest rates, dividends distributed from our preferred and common stock positions combined with interest income earned on our positions in higher yielding fixed income securities has been important contributor to the Fund’s total return.
On a one-year basis, the Stable Income Fund generated performance of +6.34% which compares favourably to the benchmark return of +5.43%. The Fund return also includes a monthly dividend of 0.03 per unit, which translates into a current yield of 3.26% on the current NAV price.
When interest rates are falling, almost all long duration assets perform well. However, when rates begin to rise, security selection and market timing can become much more critical. With this in mind, we have been careful to protect portfolio’s principal value by focusing on those preferred shares which are priced above par and trading to shorter-term call dates. Callable prefs tend to act much better during bond market sell offs as we saw in March of this year and December of last year, just prior to two of the last three Federal Reserve rate hikes.
Surprisingly, longer duration fixed income securities actually acted rather well in front of the latest rate hike in June indicating that investors are becoming more comfortable with the Fed’s slow and steady hand on the tiller. However, we did see somewhat of a delayed reaction later in the month when the European Central Bank (ECB) signalled it may begin to end its quantitative easing program. Ultra-low European interest rates have clearly helped keep a bid on fixed income prices, globally.
To further protect principal and keep values on the upswing, we have deployed some more strategically positioned securities on the common stock side of the portfolio. For example, we recently initiated a position in Analog Devices Inc., a market-leading semiconductor stock with an excellent long term record of paying and regularly increasing its dividend. ADI is in the sweet spot of the trend towards global innovation and ubiquitous information technology including the “internet of things” (IOT). We expect the company to continue delivering significantly faster earnings and dividend growth than both the broader market and its larger rival, Texas Instruments. This suggests ADI should trade at a premium valuation instead of its current valuation in line with the market and trading at a discount to TI.