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Durable Income: An Investment Strategy incorporated with Traditional Investing

 

 

I’m in my office with soon to be retired Baby Boomers and they ask me, “Should I take the lump sum or the pension from the car company I worked for over 30 years.” This is one of the most difficult decisions to make entering into retirement. It depends in part on how much cash flow we can produce from your acquired assets as compared to the monthly pension. There is no retirement without income. I recommend using all of the available resources, tools and investment strategies so you can see a way forward to make the decision.

 

One strategy we use is durable income. It can be the determining factor when combined with other traditional strategies to help add diversification, income and stability to a portfolio. Durable income offers a way to change course within an existing portfolio. Don Selkin, Chief Market Strategist for Newbridge Securities notes, “The overall bull market is now in its 97th straight month and the second longest in history.”* Developing portfolios that can reduce dependence on the stock market may be the right choice now. Owning low correlated investments, an attribute of durable income, can allow for rebalancing and purchase of assets from potential cash flows at distressed selling cyclical lows for traditional assets. Since 1990, investors have experienced either an equity bear market or rising rate environment almost half of the time. Alternative strategies have outperformed either stocks, bonds or both roughly 75% of the time since 1990.** Durable income may be a beneficial strategy.

 

Durable income is a combination of investments, it expands on the selection of varying drivers of return. It often incorporates strategies with risk management designed to enhance the stability of returns. In the current state of interest rates, fixed securities like treasuries, are at risk with their inverse relationship to rising rates. Finding other sources for monthly income may be appealing to retirees.  Based on prevailing yields and principal protection from interest rate risk, durable income investments can offer flexibility and choice beyond bonds and stocks.

 

Here is a list of securities that can be combined as a group to help create durable income:

 

  • Non-Traded REITS – Non-Traded Preferred – Life Settlements- Interval Funds
  •  Securitized Loans – BDCs - Covered Securities- Private Equity- Securitized Assets

 

In contrast, with the heightened risks of traditional fixed-income investments in the current climate, a durable income approach has the potential to provide income streams that are more stable and resilient in varying market environments. Durable income helps protect assets against the impacts of market volatility, inflation, interest rates, and in some cases offer tax benefits. Durable income helps lower a portfolio’s correlations and improves risk-adjusted returns compared to an index and a traditional portfolio made up of cash, stock and bonds. Durable income can also address investment objectives other than income, such as capital appreciation.

 

We believe any income investor seeking a useful framework for navigating markets and managing risks should research durable income strategies. Durable income has the potential for stable resilient cash flows derived from active investment programs. Finding increased drivers of return, other than just slowly rising interest rates, improve resilient and durability to an income stream. Illiquid risk premiums contribute to durable income cash flows and offer additional income streams for individuals who desire more income with less need for liquidity. Income investors with long term horizons, without the need to dip into principal, can maximize allocations.

 

Durable Income is about active investing. Passive allocation, to traditional fixed income, may make sense for investors who have a strong view that interest rates are unlikely to rise. However, passive investments may not be for investors who seek multiple sources of return and resulting income. Active risk refers to the risk and return generated by the unique decisions of an investment manager or program sponsor. Active managers are making security selection and market timing decisions. The active manager attempts to add value in one or two ways, typically:

  1. Market Timing - tactically changing exposures to different sectors in order to capitalize on short-term trends or avoiding sectors all together.
  2. Security Selection – identify undervalued or overvalued securities and purchasing or selling these in the expectation the prices will return to fair values.

Active managers should have the expertise and experience in knowing the correct market entry and exit points. The best durable income sponsors are successful in tactical investing because they have strong knowledge of their respective sectors. In addition to identifying historical patterns, these managers understand why market dislocations and fragmented markets are likely to continue. Astute active managers recognize patterns that occur by chance and avoid developing strategies based on patterns they cannot explain. Beyond historical analysis, they understand how an investment thesis evolves over time in response to new market conditions. Active managers are involved in the day to day operations and above all, in executing and monitoring performance to complete an investment exit for the return of investor’s principal. Active managers have a vested interest in the outcomes for clients because they often participate and share in the total return of the investment program.

 

Durable income is not a single security or an asset class but an active strategy that requires ongoing research and the comparing of sponsors and their different investment programs. There are barriers to accessing the durable income sponsors. There are barriers to approved investments. Therefore, it is important to understand the financial source that is offering to execute the durable income strategy for any portfolio. A financial professional needs to be active in the durable income strategies as a regular component of their portfolio management. These professionals need to stay abreast of the industry to identify trends and pitfalls to advise and protect clients unaware of the internal working of an expanding and contracting industry. The sharp knife is a preferred tool.

 

All investments carry risks as do investment strategies.  An investment strategy that is conservative may not have equity risks but have inflation risk. An aggressive stock strategy may have stock market risk but not have liquidity risk. Durable income has risks to its strategy. Because active management is part of durable income there is execution risk. Also an investor’s capital is used to develop the investment program, which means that is not immediately available for return to the investor, creating liquidity risks. Because a durable income strategy incorporates various uses and different securities from varying assets classes, knowing the risk to the strategy may not be feasible until a portfolio is constructed for review and detailed by the financial professional. Understanding risks of any strategy is an important aspect to research before placing capital for investment.

 

It has been my experience that once an investor qualifies and has incorporated a durable income strategy as part of their overall portfolio, then maintaining the strategy takes on greater importance. As an example; a security that matures will pay back the investor’s principal and will no longer pay the income stream. It is incumbent upon the financial professional to be prepared for the exit and offer securities for replacement to continue the durable income strategy.  Within the durable income strategy there needs to be diversification amongst the various securities, assets classes and investment sectors to avoid concentration and too many exits in the same time frames. Your portfolio, your income, your retirement, it’s your decision.

 

Disclosures

The opinions expressed are those of David R. Zoellner, Sr. The investments discussed in the article do not represent any proprietary product from Zoellner Whole Financial PLLC or Newbridge Securities Corp. The information discusses general market activity, sector trends, broad-based economic and market activity and should not be construed as research or investment advice. The material is for informational purposes only and not a recommendation to buy or sell any securities mentioned or not mentioned in the article. Past performance is not indicative of future results. Please consult your personal financial, tax or legal professional for advice tailored to your specific needs. Zoellner Whole Financial PLLC is not affiliated with Newbridge Securities Corp. or Newbridge Financial Services Group Inc.

 

Source:*

www.forwardinvesting.com “Durable Income Investing”.

Don Selkin: Chief Economic Advisor for Newbridge Securities 05/10/2017

**Bloomberg and GSAM:  02/16/2016: https://www.gsam.com/content/dam/gsam/pdfs/common/en/public/articles/2016/Conversation-Starter-Alternatives-Can-Be-Core-Strategies.pdf?sa=n&rd=n

Sameer Jain; A Case for a Durable Income 11/14/2013 (SSRN eLibrary #20)

 

David R. Zoellner, Sr. Chief Executive Officer / Chief Investment Officer

 

Additional disclosure: This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Zoellner Whole Financial PLLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter.   Zoellner Whole Financial PLLC expressly disclaims all liability in respect to actions taken based on any or all the information provided. 

 

 

 

 

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