Reiner: Beyond Bonds For Safe Retirement

February 25, 2014

You should own your age in income-producing securities, Wela Strategies’ Reiner says.

Mitch Reiner is head of the $1.3 billion wealth management firm that the ETF portfolio shop Wela Strategies grew out of. Today he is delivering ETF solutions to investors of any size. Wela has just $80 million in assets, but the unit is growing rapidly as it markets its asset allocation models to outside advisors.

At the heart of his practice is a focus on securing income, and he does so not only through bonds, but through a strategic multi-asset class allocation approach that’s designed to keep money trickling in no matter what the market does.

He recently shared with’s Cinthia Murphy his views on finding yield in a rising-rate environment. Your practice focuses heavily on income. How do you go about building your portfolios?

Mitch Reiner: We have two basic product suites. One is the “Own Your Age,” which is very simply based on what Jack Bogle would say about owning your age in bonds. Obviously, we know that’s probably not a very good strategy to own your age just in bonds, but the idea is simple: Own your age in income-producing, less aggressive investments.

As you get older, you tend to get more conservative. We’re using a target allocation so that you know exactly the exposure you have. It’s all about simplicity. If I own the “Own Your Age 40,” that means 40 percent of my portfolio is allocated to income-producing investments, most of which is in bonds, and 60 percent of it is tied to growth-type investments. We’re very strategic.

The other product we have is the income-focused “Agg Yield” strategy, which is kind of unique. With the proliferation of ETFs, we’ve been able to replicate at Wela what we were doing with individual securities at our wealth management firm.

I think aggregate yield is going to be key in the next decade of rising rates, however slow or fast they may actually go up. By that I mean combining different high-yielding asset classes together to get you a unique stream of income, which, regardless of what the market is doing day to day, will still provide a consistent stream of income. What types of securities go into the Agg Yield strategy?

Reiner: We’re combining bonds with closed-end funds, MLPs, REITs and preferred stocks. These are all asset classes that advisors know individually well. If you ask advisors what a preferred stock is, they can explain it. But it’s a matter of knowing how much preferred stock to own relative to REITs in a portfolio at a given time—not only as an asset class, but also more granularly, like owning technology stocks versus financial stocks. There is a time to own them when they’re fundamentally a good value, and times when they’re not.

As an example, MLPs were up 23 percent last year. So, to have that as a component of your income portfolio would have been a great hedge to bond prices. Knowing when to dial up and down the allocation to those specific asset classes is what we take off the plate of an advisor. We make those decisions.


Reiner (cont'd.): Ultimately, in a period of time where rates are going to be rising—and we all need income, and baby boomers are getting older—we’re going to need to find income from other asset classes beyond bonds.

We look at it as three separate sleeves in our Agg Yield. First, there’s a fixed-income sleeve, where we’re dialing up or down the duration risk or the spread, as well as deciding whether you want to be in investment-grade versus Treasurys, or international versus domestic bonds.

The second sleeve is closed-end funds, which I think is a totally opportunistic asset class that’s underappreciated, because they’re generally regarded as illiquid. They also have leverage associated with a lot of them, so a lot of people just stay away from them. But those traits make it a very inefficient market, and closed-end funds give you a relatively cheap way of accessing that type of leverage, which can appeal to ordinary retail investors.

In a rising-rate environment where you see rates moving higher over a 12-month period or longer, closed-end funds do pretty well because of the spread they get by borrowing at a very low interest—the short rate—and lending at a much higher rate.

Finally, the third sleeve is REITs, MLPs and preferreds all combined into one group. So the old traditional model of equities plus bonds no longer fits. Investors have to accept that they’re going to have to look elsewhere to find yield?

Reiner: It depends on your expectations. If bonds are in your portfolio simply not go down when the stock market goes down, you’ll probably realize a negative real rate of return. But that may be OK to people if they’re just looking for a risk-off allocation.

However, the problem is that we’re in a world where people need yield, and you’re not going to get that yield out of bonds for a while. You need to seek out other opportunities to increase that yield.

I believe your total overall return will be better if you combine some of these equitylike income securities, like MLPs and preferreds and REITs, and also have a higher yield. In fact, you could have not only a higher current yield, but if you manage it properly, you could end up with a significantly better total return relative to bonds, which, theoretically, will lose some of their value as rates rise. What kind of yield should investors expect from your Agg Yield portfolio? What’s the target?

Reiner: It’s 5 to 7 percent, but it depends on whether we’re in a risk-off mode or not. We allocate both across each sleeve—fixed income, closed-end funds and REITs, MLPs and preferreds, dialing up or down the allocation in each of the sleeves—and we allocate inside of each sleeve, being strategic about things like duration.

If we go huge risk-off, and we go overweight to fixed income, the yield may be closer to 5 percent, as opposed to right now, where we saw tremendous value in closed-end funds. We’re overweight closed-end funds, so our yield is like 6.6 percent. We saw a huge move last year toward shorter duration, but this year we’re seeing some flows back in the longer-dated end of the curve. What’s an investor to do about exposure to duration today?

Reiner: I think the shock may be over. Rates are going to rise, but I may get compensated for the additional yield I get. That may be enough compensation to offset the fact that rates are going to yield from, say, 3 to 3.25 percent, and that’s OK. If it only moves 25 basis points, you get compensated with the extra yield you would get with longer-duration bonds.

Maybe people think the dust has settled. We now are accepting that tapering is going to happen, and rates may creep up, but they may not spike up, because a spike is what would kill longer-duration debt. But again, I’m not suggesting that individual investors be overly allocated to longer-term duration bonds. That may be more of a trade. What would you say is crucial for investors to keep in mind when it comes to income?

Reiner: If you’re just looking at having a fixed-income allocation in your portfolio, you can probably do just as well going to Vanguard and buying a couple of index funds and calling it a day. I really believe in keeping it simple, and keeping costs low. That’s going to likely yield your highest probability of success long term.

But on the income side, I would say that as soon as your life starts to transition away from accumulation to distribution, focus on income. Focus more on the real cash flow and less on the day-to-day value of a portfolio.

If you’re going to retire, and your retirement is going to depend on the value of your portfolio day to day, you’re going to live a very volatile retirement. However, if you can construct a portfolio that generates you a yield month in and month out, no matter what, that’s what you can depend on. That’s what supplements your Social Security and pension income. It’s a sleep-well-at-night way to live.

Get away from performance. Look at whether you got the same $5,000 a month on that portfolio this month that you did 12 months ago and 24 months ago. Yes, the value may be up or down 10 percent, but theoretically, income stays consistent. I suggest the way to do that is by diversifying your income portfolio into a multi-asset class approach.



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