Current PIP Memos
2017-01-15 PIP Quarterly Year End Update
January 15, 2017
Dear Mr. and Mrs. Smith,
2016 marked the eighth year of our Preferred Income Portfolio (PIP). Through those eight years, our investors have enjoyed above-market income and below-market volatility. 2016 started with the stock market dropping about 11% while PIP suffered about a 5% loss. Then it was off to the races with a furious rally into the end of the first quarter, closing with a gain of about 1%. The second and third quarters saw significant price gains with many preferred stock issues reaching record highs in the third quarter as the S&P 500 Index established a real estate sector, creating a demand for the Real Estate Investment Trust (REIT) preferred shares. The post-election stock rally and subsequent rise in interest rates caused a drop in the prices of our preferreds and we closed the year with about a 1.8% price decline. This decline was in the price of the preferred securities and had no impact on the income generated which remains close to 7%. We maintain an over 3% higher yield than the 30 year U.S. Treasury and beat our benchmark return. Barclay’s Intermediate Government/Corporate Bond Index by a wide margin. Total returns averaged in the 3% to 5% range (gross of fees) for 2016.
TIA has consistently stressed how the aspects of PIP are key to our “Bridge to Higher Interest Rates” (Bridge) strategy. There are basically two reasons to invest in fixed income securities: income and low volatility. PIP provides income of 6.5% to 7% per year with quarterly payments, twice as often as most fixed income securities. Quarterly payments allow us to adjust to changing interest rates as more frequent reinvestment helps smooth the transition to higher interest rates. Our PIP fixed income strategy keeps your investment earning income with less than half the volatility of the stock market. The “call” feature of our PIP securities is another aspect of our Bridge strategy. New issues of preferred stocks are coming to market at lower coupon rates. These new issues provide the financing to call, or buy back, our higher coupon preferred shares when eligible. This part of our Bridge strategy helps limit portfolio duration.
Since election, interest rates have risen dramatically. However, they remain historically low. We believe interest rates will normalize, but this process will occur over the next several years, not the next few months. TIA’s Bridge strategies will assure that PIP remains a viable investment strategy for the foreseeable future, regardless of the movement in interest rates.
We welcome your inquiries regarding your Preferred Income Portfolio.
J. Ron Delay
Senior Vice President
Manager, Preferred Securities