NewArc Investment Inc. | Enhanced Yield
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It is a challenging time for investors who need regular income.  Bonds and CD’s are returning so little that it almost seems like you have to pay the banks to hold your money!
 
This is a dangerous situation, since it pushes the yield-hungry investor into risky assets.  It is easy to calculate the income stream, but much more difficult to evaluate the risk in the underlying assets.
 

The Problem

 
The Enhanced Yield Program is a direct response to current market conditions and investor needs. Here is the problem:

 

  • Many investors need yield – either as regular income or to reduce portfolio volatility.
  • Safe bond yields are at an all-time low. Whether it is the Fed “punishing savers” or the market flight to quality, this is the reality.
  • Most “yield” approaches are dangerous. Sometimes yield comes from a raid on the nest egg. Other times the apparent yield is not supported by fundamentals. There is no magical, risk-free way to get yield.
  • Many investors are worried about headline risk in the markets and prefer a cautious approach.If those arguments describe your feeling, this program might be for you.

 
Investors can and should choose a personal asset allocation.  Two questions are crucial:
 
1. Are you preserving wealth, or creating wealth?
2. What is your personal risk tolerance?  Can you see through the swings with a longer time horizon?
 
These programs are much safer and more rewarding than simply buying the top dividend stocks or the highest-yielding bonds.
 

Program Description

 
The Enhanced Fixed Income program is relatively new, but the techniques are not.  I have been advising  bond and options traders for nearly 25 years.  This program brings together investor needs, the current market opportunity, and my own skills.
 
While this is a relatively new program, it combines elements from three of our best ideas. These are all part of my “Yield Quest” series, some of the most widely-followed articles on Seeking Alpha.
 
1. We start with strong dividend stocks. There are many pitfalls at this step, starting with screening for the highest yield. That is a good way to lose your nest egg, as I explained in the article. We find strong stocks with reasonable yield.
 
2. We sell calls against our stocks. This is a very safe option strategy, although choosing the right call and adjusting positions takes some skill. This step adds a lot to the yield.
 
3. We use our experience in timing the options market – both when to start a position and when to sell the calls.
 
A bond ladder has a special value at a time when interest rates are rising – right now!  As a lender, you do not want to lock in low rates for the long term.  Instead, you have a portfolio structure that accepts some very low (and very safe) short-term investments and does not make commitments too far in the future.  When the near-term “rungs” of your ladder mature, you can roll out to the new and higher yield opportunities.  Meanwhile, the overall average duration of the portfolio is under your control.
 

The Enhanced Yield Pro Forma

 
Experienced investors know that financial results are often based upon a Pro Forma. This often involves a formal projection of results based upon certain assumptions. Using this approach, what can we expect from the NewArc EY program?
 
1. Yield is 3% or more. This is known.
 
2. Call sales generate at least 10% income. These are short-term to enjoy the most rapid time decay.
 
3. Fees are about 2% per annum, depending upon account size. (The fees reflect the extra trading and analysis from our team.)
The result is that we expect a gain of about 9% per year after fees and some trading slippage. This can either be pure yield or, if reinvested, the account value will double in eight years.
 
The Pro Forma ignores changes in the underlying stock values. I am asking investors to join with me in making two assumptions, based upon a five-year holding period:
 
1. If they bought a five-year bond, and tried to sell it before it matured, they would lose money. Interest rates are probably going higher, and therefore bond prices will go lower. I ask that Enhanced Yield Program investors compare this program to a bond purchase. This means that you do not worry about short-term fluctuations in the prices of the underlying stocks.
 
2. We can choose stocks that will have equal or greater value in five years. We pick stocks that have great prospects, great management, great balance sheets, but also strong technical support.
 

The Risk/Reward

 
Choosing the right program means balancing risk and reward. The Enhanced Yield program compares favorably with most conservative alternatives. The problem in making comparisons is that the noise of the short-term stock movement overwhelms the basic strength of the program. It is fine to do a period reality check on how we are doing, and we will report on that. Meanwhile, it is important that the time frame is long enough.
 
Let us consider several different risk/reward situations.
 
1. Stocks make a major upside move. In this case, the program will seriously lag the market, since we will make our 8-9% or maybe a touch more. Investors who really want to enjoy a major market move need to consider our Great Stocks program – at least for a small allocation.
 
2. Modest upside move. We will probably match or exceed this.
 
3. Sideways market. This is the home run for the EY program. We make a great return while stocks are doing nothing.
 
4. Modest downside. In this situation we will probably meet our objective, but might have a small miss.
 
5. Big downside. We have less overall risk for the reasons noted above. Investors who already have met their objectives should consider “no risk” programs like our bond ladder.
 
If this program sounds enticing to you, we encourage you to contact us and schedule a call with Jeff. This is the best way to get more information – especially for your own personal investment needs.