LOM Stable Income Fund Manager’s Report Q3 2017

Market analysis

Over the third quarter of 2017 the LOM Stable Income Fund once again demonstrated strong performance on both an absolute and relative basis. While growth stocks have stolen the headlines in terms of broader equity market performance this year, the Stable Income Fund’s ‘tortoise’ strategy of investing in more mature dividend-paying companies has also produced positive results which helped us to outdistance our stated benchmark for both the quarter and the year. Over Q3, the Fund generated a net total return of 2.45% compared to a 1.36% return on the benchmark.

On a rolling one-year basis, the Stable Income Fund achieve a total return of 5.72%, again comparing favorably to the benchmark return of 4.85% over the period. The Fund’s return also includes a monthly dividend of 0.03 per unit, which translates into a current yield of 3.21% at the current NAV price.

As the business cycle matures and credit spreads continue to grind tighter, we have become increasingly fickle in our security selection for both preferred issues and those common stocks which fit our high-dividend paying parameters. Our intensive research process biases us towards those companies which have relatively lower debt levels, stable earnings, and ample cash flow to continue paying their dividends and increase these payouts at a reasonable rate over time.

Our current asset allocation is approximately 58% equity and 42% fixed income. The fixed income portion of the portfolio is primarily represented by preferred issues or so-called baby bonds. These securities generally possess longer durations, however many of them are trading to near term call dates which effectively reduces 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 remain focused on those issues with a history of being generous with dividends. Often the best strategy a mature company can make is to pay its excess profits out to investors rather than investing in new projects or buying other companies, perhaps outside of management’s sphere of expertise. In the common stock portion of the portfolio, our largest subsector weightings include electric utilities, telecommunications companies, health care and energy. In the energy group we prefer U.S. pipelines whose business models are to simply transport energy products across the country and which generally do not take on commodity price risk by investing in exploration and production ventures. Our pipeline investments pay steady and growing tax-advantaged distributions in the five to seven percent range.

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The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.