LOM Stable Income Fund Manager’s Report Q3 2018
By Bryan Dooley | October 11, 2018
Over the third quarter of 2018, the LOM Stable Income Fund outperformed its stated benchmark by delivering a total return, including dividends of 2.03% compared to the benchmark return of 0.46%. The Fund continues to stay ahead of its benchmark and has outperformed most of its peers even as rising interest rates have begun to pressure the longer end of the yield curve.
For the trailing one and three-year periods, the Fund generated annualized total returns of 0.71% and 5.25%, respectively compared to benchmark returns of -1.17%% and 4.73%. Over the past five years, the Fund has produced an average annualized return of 3.85% through the end of the latest quarter. The Fund returns include a monthly dividend of 0.03 per unit, which translates into a current yield of 3.29% at the latest NAV price. The current dividend yield represents an increase in yield from the 3.19% yield offered by the fund at the beginning of the year.
Shorter term interest rates been on the rise since late 2015. Most recently, the Fed increased the U.S. base lending rate by another 0.25% at the latest FOMC meeting in September. While short rates have been climbing from near zero levels a few years ago, longer-term interest rates have taken much longer to respond to policy adjustments. Ongoing ultra-low interest rates in most other developed regions have kept a lid on longer-term U.S. interest rates and only recently have US rates begun to adjust accordingly.
The Fund’s current asset allocation is approximately 48% equity and 52% fixed income. The fixed income portion of the portfolio is comprised mainly of preferred issues and so-called baby bonds. These securities generally possess longer-term final maturities. However, many of our holdings are “premium” bonds 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 possess a track record of rewarding shareholders with high stock dividends. As one might expect, the equity portion of the Fund includes a large allocation to mature industries such as electric utilities, telecommunications and energy. But more recently some larger dividend-paying technology issues and banks with rising payouts have been making their way into the portfolio. Prior to the Great Recession in 2008, many bank stocks offered above-average dividend yields, but these dividends were quickly slashed in the aftermath of the credit crisis. Ten years later, however, the majority of U.S. banks have repaired their balance sheets and many are now in a position to begin raising dividends once again.
Looking forward, we anticipate ongoing market challenges as interest rates continue to rise and trade tensions flare. In the months ahead, we expect both fixed income equity asset classes to experience great volatility as central banks around the world continue to withdraw monetary stimulus. For this reason, our investment process is increasingly focused on selectivity.