July 2017 Newsletter to Clients

Enjoy this month’s edition that features an explanation of some of your Long-Term Income investments. 

 

When you review your monthly net worth statement or when you meet with us – and we encourage you to meet with us regularly – you may wonder why you are invested in the funds and asset classes that you are. If asked, most of you would answer that your portfolio is structured to support you and your goals and that you are diversified. But, what does diversified in this context really mean?

 

Generally speaking, we structure your portfolio to try to take advantage of increases in the stock market while trying to protect you for when the market declines. How do we do that? You guessed it, we diversify your portfolio. More specifically, we invest a portion of your assets in funds that are not composed of company stocks and, as a result, may increase and decrease independent of the stock market. 

 

All our clients own some funds that are considered to be Long-Term Income assets. That is, they are held because they generate income in the form of distributions and they are not directly related to the stock market. Currently, many of these Long-Term Income assets are invested in funds that purchase bank loans: BlackRock Floating Rate Income Trust (BGT), BlackRock Floating Rate Income Strategies Fund (FRA) and Lord Abbett Floating Rate Fund (LFRAX) are all funds held in clients’ portfolios. 

 

Lord Abbett recently published a review of bank loan funds and did a good job summarizing why we recommend holding these types of funds in clients’ Long-Term Income Asset category. Their review said: 

 

1) These types of funds produce a high level of income and have recently provided roughly twice the income of an aggregate bond index and more than double the 10-year Treasury note. 

2) They provide attractive risk-adjusted returns. This means they provide a higher level of return per unit of risk than traditional bond funds. 

3) They are a good way to diversify a portfolio. 

4) They perform well as interest rates are rising. 

 

The Federal Reserve increased its benchmark rate and has signaled it intends to do this again during 2017, moves made in order to decrease the money supply and keep inflation at bay. With a decreased money supply, long-term interest rates should rise, as does the cost of borrowing. This means interest rates on bank loans should rise, which should provide more income for funds that purchase these loans from banks.