2012 First Qtr Portfolio Performance
The markets have done well for the first quarter of 2012. We have new milestones for all three of the major indexes. I’d say the NASDAQ breaching 3,000 is the most significant because we haven’t seen that number for over 10 years!
S&P500 1,402.21 (+12.0% YTD)
DOW 13,102 (+8.1% YTD)
NASDAQ 3,044 (+18.7% YTD)
The DOW is underperforming relatively because its big hitters, MCD, IBM and CVX have underperformed (remember that the DOW is a price weighted index not market cap weighted!). Apple single handily has really improved the returns of both the S&P500 and NASDAQ. Apple is now 12% of the entire NASDAQ and 17% of the NASDAQ 100. Apple is the reason why the NASDAQ breached 3,000, with an over 50% gain in the shares so far this year.
The “risk on” trade started to get moving in 2012, with Financials, Energy, and Consumer Discretionary leading. As the quarter ends, it looks like this trade is losing steam. It will be interesting to see how things develop next quarter.
There has been a slight shift in bonds and bond like investments which will give you a glimmer of what could happen when interest rates rise. The market made a small move off of the improved economic data by moving Treasuries, municipal bonds and Utilities all lower. We are talking about 33 basis points on the 10 year Treasury (currently trading about 2.2% yield or 220 basis points). It isn’t a big move. And even that move has softened somewhat as the quarter ended due to concerns about overseas growth.
But what was also interesting is that low grade debt is still going higher. I think the best place to be now in the fixed income markets is in low investment grade, or near investment grade debt. This affects my portfolio because that’s where my preferred stocks are. Two of my preferred stocks, O-E and HCN-D, were called, along with another preferred that I had wanted to buy (NNN-C). This means that the company pays you par value for each share plus whatever interest payments that were due (in each cash, par value was $25. This is very similar to what happens to callable corporate bonds). The companies were able to issue new debt or equity at lower yields which they used to take this higher interest rate debt.
The market was overpricing the old debt to the point that it was priced not at, say its 7 3/8% par but under 7%. The new debt is coming in @6 5/8%. Investors are still wanting yield. It makes sense because the Fed hasn’t shown any intent to raise interest rates at all.
This portfolio is invested in stocks that are not cyclicals so it would be expected that it would underperform a strong market that is based upon economic growth. Most of the positions did underperform except two of the tobacco companies, Philip Morris (PM) and Lorillard (LO).Their out-performance was further improved when considering dividend yields, which are not reflected in the quarterly gains.
The called securites, O-D and HCN-D were rolled over into O-E.
MER-E performed well because of a good comparison after it sold off last year as Financials were hit hard (it’s a preferred stock that Bank Of America took over when they bought Merrill Lynch). As Financials have recovered this year, so has MER-E. It’s trading at about par value right now.
|Investment||Name||Portfolio (%)||2012 1st Qtr Gain
||2012 Dividend yield (qtr end)
||2012 Total Return
|O.E||Realty Income E preferred||(2.9%)||6.8%|
|O.D||Realty Income D preferred||CALLED||7.4%|
|HCN.D||Health Care REIT D preferred||CALLED||7.8%|
|MER.E||Merrill Lynch E preferred||20.0%||7.2%|