August 2018 Newsletter to Clients
Submitted by Moneywatch Advisors on August 7th, 2018Enjoy this month’s edition that features an update on BlackRock Floating Rate Income Trust (BGT) and cash sweep accounts.
BlackRock - In our June, 2018 Newsletter we discussed an investment many of our clients own, BlackRock Floating Rate Income Trust (BGT) and its sister fund, BlackRock Floating Income (FRA). BGT is a fund with an investment objective of providing a high level of current income. It does this by investing in a portfolio of floating rate and variable rate securities. In layman’s terms, BGT and FRA invest in bank loans, primarily loans made to companies such as First Data Corporation and CenturyLink, just to name two. In a rising interest rate environment like the current one, floating rate funds should be able to increase their distributions to us, their shareholders.
As we described in June, our team talked with BGT representatives in May to inquire when BGT would increase their dividend and provide more income to you. We questioned them because short-term interest rates have been rising but BGT’s monthly distributions weren’t.
We now have good news! Both BGT and FRA increased their monthly distributions. BGT raised its payout from $.058 per share to $.062 per share, payable starting with their July 13 distribution. Similarly, FRA increased its payout from $.061 per share to $.065 per share, also payable with the July 13 distribution. That may not appear on the surface like a large amount but, for BGT, that’s a 6.9% increase in their distribution.
Given the current market prices of each fund, the yields – meaning the annual distribution as a percentage of the market price – are both well above 5%. This is quite healthy and plays an important role in many of our clients’ portfolios.
Cash Sweep Account - We recently had a client inquire about an article they read in the Wall Street Journal (WSJ) involving money market funds we thought our response was worth sharing.
Question from client: “There was an article in the weekend edition of the WSJ entitled, "How Brokers Make more On Your Cash Than You Do." It discussed the practice of firms "sweeping" clients idle cash from money-market funds and into lower yielding bank sweeps. The bank then hands the brokerage firm a hefty fee, and the brokerage firm hands its client some crumbs.
I see ads from brokerage firms touting about how they are acting in my best interest. Pushing me into sweep accounts that are far more lucrative for them than for me seems inconsistent with that laudable goal.
TD Ameritrade was not one of the firms mentioned in the article. My question is does TD participate in this practice, and how much interest do they pay clients with idle cash?”
Answer: “Moneywatch decides where your ‘cash’ is invested. For all clients we have chosen the TD Ameritrade FDIC Insured Deposit Account. (We switched to this one when money market funds started to ‘break the buck’ during the financial crisis.)
Brokerage firms/banks have a suitability standard they must fulfill (often a ‘don’t ask don’t tell mentality’), Moneywatch operates under a more strict fiduciary standard (obligated to act in your best interest).
All financial institutions that hold money are paying out at a rate lower than they are receiving; drives profits, this is the ugly side of the business and why so many people get taken advantage of.
Specifically – could we find a money market fund that yields more than the current .08% you are receiving? Yes, probably, but it would not make a big difference in the long term as we are currently only targeting to hold about $2000 in cash at any one time.
We do have discussions with clients that have ‘shorter’ term cash needs and try and direct those monies into funds that will yield more than a money market fund but also not take on price fluctuations that a longer term investment might.”
Thank you for your continuing confidence.
Past performance is no guarantee of future results. The opinions expressed are those of Moneywatch Advisors, Inc. and are no guarantee of the future performance of any particular fund. This information is for educational purposes only and is not intended as investment advice. Please consult your financial advisor for more detailed information or for advice regarding your individual situation.
