LOM Stable Income Fund Manager’s Report Q2 2018
By Bryan Dooley | June 30, 2018
Over the second quarter of 2018 the LOM Stable Income Fund outperformed its stated benchmark, delivering a total return (including dividends) of 1.96% compared to the benchmark return of -0.35%. Positive performance during Q2 helped reverse a first quarter decline in market value as investors fled income- producing sectors in favor of higher growth sectors such as technology.
For the trailing one and three-year periods, the Fund generated annualized total returns of 1.12% and 1.99%, compared to benchmark returns of –0.82% and 1.26%, respectively. Over the past three years, the Fund has produced an average annualized return of 3.76%. The Fund’s return includes a monthly dividend of 0.03 per unit, which translates into a current yield of 3.32% at the current NAV price. The current dividend yield represents an increase in yield from the 3.19% yield offered by the fund at the beginning of this year.
Over the past three months, short-term interest rates been on the rise with the Fed increasing the U.S. base lending rate by another 0.25% at the latest FOMC meeting in June. However, despite the tightening of monetary policy, both equities and fixed income managed to gain ground over the period as longer-term interest rates remained subdued. Many longer term fixed income securities were better bid by quarter end in addition to throwing off attractive income distributions.
The Fund’s current asset allocation is approximately 48% equity and 52% fixed income after we modestly increased our equity exposure earlier in the year. The fixed income portion of the portfolio is primarily represented by preferred issues and so-called baby bonds. These securities generally possess longer-term final maturities. However, many of these securities are trading to near term call dates which effectively reduces the interest rate risk for the portfolio as a whole. We look at each security on both a current yield and yield-to-call basis.
On the equity side, we continue to invest in stocks which have historically been generous with their dividends. Our largest sector weightings necessarily include electric utilities, telecommunications companies, financial services and energy. However, in recent years, many larger cap technology issues have become more mature and utility-like, paying larger dividends and thus making the cut for our screening criteria. Towards the end of the quarter, we also saw better pricing in the $25 par, hybrid security market as fears of a global trade war stoked a flight-to-quality bid.
Overall, a flattening of the U.S. yield curve with longer-term fixed income securities staying well bid even as the Fed raises interest rates have helpful for this strategy. Presently, the existing gap between the two-year Treasury Note and the ten-year U.S. Treasury bond is the lowest since August 2007.