How We Tweaked Our Portfolio For Rising Rates

By John Gerard Lewis

The Covestor Stable High Yield portfolio invests in income-producing securities. The goal is to maximize long-term total return while mitigating volatility.

In light of the Fed's mid-summer suggestion that its bond-buying program could start to wind down in September, a certain amount of volatility was removed from the portfolio by selling all holdings of mortgage real estate investment trusts (mREITs). The mREIT allocation had been particularly damaged by the rise in rates and the Fed's indication that tapering of its bond-buying would soon occur.

The portfolio's composition was thus altered in order potentially to achieve its goal of optimal total return with relatively stable asset value. Approximately 44% of the portfolio is now allocated to the Guggenheim BulletShares 2014 High Yield Corporate Bond ETF (BSJE), which yields 3.2%, based on recent monthly distributions. Its holdings mature by Dec. 31 of next year, which, like most short-term investment, seeks to limit both its interest rate and default risks. This position means nearly half of the portfolio is in maturities of 15 months or less.

Fifty-four percent is now allocated, in nearly equal parts, to three higher-yielding bond closed-end funds: The DoubleLine Income Solutions Fund (DSL), DoubleLine Opportunistic Credit Fund (DBL) and Pimco Income Strategy Fund II (PFN).

At the time of this writing, all three yield over 8%. The obvious concern with these longer-maturity funds is interest-rate risk, but I don't think that is a threat over the next year or two, as I noted in a recent article. Should there be any change in this outlook, I would move an appropriate amount of this closed-end fund component to low-duration holdings or cash.

The investments discussed are held in client accounts as of September 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.

John Gerard Lewis

John Gerard Lewis

I am John Gerard Lewis, a registered investment adviser representative based in Olathe, KS, and the Founder and President of

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