The approach to income investing has been dialed up a few notches in the form of the Innovator Matrix Income Fund Ticker:(IMIFX), which invests exclusively in income-generating pass-through vehicles including master limited partnerships, business development companies and real estate investment trusts.
“We're taking a holistic view of pass-through securities because we believe we can find something that will produce income in any type of market environment,” said Steven Carhart, portfolio manager and chief investment officer at Trust & Fiduciary Management Securities Inc.
Mr. Carhart, whose firm has been managing a similar strategy in
separately managed accounts for the past 10 years, is managing the new mutual fund on a subadvisory basis for the asset management arm of CliftonLarsonAllen LLP, a diversified accounting firm with $3 billion under advisement.
“It's almost like another asset class or a
hedge fund surrogate,” he said. “It's extremely safe and extremely transparent, and we're aiming for high-single-digit income without a lot of volatility.”
The portfolio will average between 20 and 30 positions, allocated across eight pass-through categories represented by business development companies, master limited partnerships, royalty trusts, mortgage and equity REITS and three types of closed-end funds.
These kinds of securities are attractive to income-seeking investors because they are exempt from corporate income tax and thus required to pass almost all of the income on to shareholders.
The objective of the fund will be to rotate across the various categories of securities as the market cycle changes.
Royalty trusts, for example, which are companies that own natural resource assets, tend to do better during periods of commodity price inflation.
An example in this space is the $2.4 billion BP Prudhoe Bay Royalty Trust Ticker:(BPT), which has a 6.8%
dividend yield.
The best cycle for business development companies is a period of reasonable economic growth, improving credit conditions and low inflation.
An example of such a company is the $594 million
BlackRock Kelso Capital Corp. Ticker:(BKCC), which has a 12%
dividend yield.
Mortgage REITs are perhaps the best adapted to the current market environment, according to Mr. Carhart, because they do better during periods of very slow economic growth and very low inflation.
An example is the $15.6 billion Annaly Capital Management Inc. Ticker:(NLY), which as a 14.2%
dividend yield.
Mr. Carhart said his strategy has historically generated annual yields of between 7% and 9%.
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