Hawking Portfolio Review: 8 January, 2024

Loch Ness, Scotland – but no Monster Sightings

Not a lot of action here as this is essentially a Buy-And-Hold Portfolio with a re-investment of dividends ($2,000+ since the last review).

Current holdings look like this:

with an anticipated 12% annual yield – or over $1,000 per month “income” from dividends.

Performance of the portfolio since inception in December 2020 (4 years) looks like this:

with returns well above those of the benchmark AOR Fund.

One of the things to remember about Closed-End-Funds (CEFs), that pay out what look like very attractive distributions (8-12%), is that not all these funds generate enough income from Net Investment Income (NII) to cover the distribution payment. They therefore have to make up the difference from invested capital – i.e. the difference becomes a return of the investor’s own money, a resultant reduction in funds available for investment and a corresponding drop in share price. If the fund can generate value through “growth” in addition to “investment” then this does not matter and the fund remains attractive. However, if the fund cannot generate the “growth” to make up the difference then, at some point, the fund will have to reduce the distribution to match it’s total net income from investment and growth. This, then, often triggers selling and a reduction in market value as investors bail out.

One fund that I’m watching right now is ACP (Aberdeen Income Credit Strategies Fund):

In July I drew a trend line thinking that price might break above the ~$7 resistance area that had been tested a number of times prior to that date. However, price broke down and is now trading at ~$6 – or ~14% below where it was 12 months ago. About half of this has been lost in the past month and ACP is not covering the 18% distribution, that it is paying out, from NII. Thus, although not disastrous, the net return from this fund over the past 12 months is only ~4%. If this distribution is cut and investor’s bail out then the investment does not look attractive until everything is balanced out again. I will be following this fund going forward and will sell if price drops below $5.80. This is one example of where I may sell something rather than just Buy-And-Hold (or Hope). Since the portfolio is presently holding 27 funds the impact is small. Diversity is how I am managing risk here.