How to Allocate Your Income-Generating Assets Now

As we enter into earnings season, with trade negotiations heating up and the Fed looking for signals on the next direction, we should examine our positioning within our income-generating assets. I facetiously call this the Hopium/Doomium model in reference to those who often refer to bulls as living in a world of Hopium and those Doomers on the other side of the equation (most of whom have missed significant market gains). The model attempts to assess how good the fundamentals or reality is on the one side. On the other side, I attempt to assess what market sentiment or positioning is. It is partially subjective, but has stood the test of time well. What is interesting is when we identify outliers, when fundamentals/reality deviate from sentiment/positioning. When looking at the world this way, several conclusions come to mind: -- Sell high-yield funds or ETFs (iShares iBoxx $ High Yield Corporate Bond , SPDR Bloomberg Barclays High Yield Bond , etc.) and buy leveraged loan funds (Invesco Senior Loan , SPDR Blackstone / GSO Senior Loan ) ETFs, or better yet, closed-end funds (CEFs). For leveraged loans I really believe active managers and CEFs are the way to go I continue to own Eaton Vance Senior Income Trust and am debating adding more despite recent strength. The biggest mistake I see people making is that they are selling leveraged loan funds (including CEFs) because they are afraid that the Fed might cut rates. I have a strong belief that if the Fed cuts rates, it is because the economy is in a tailspin, and you will be happier to own leveraged loans which are senior in the capital structure than high-yield bonds. You may have read some concerns about covenant-lite loans diminishing the seniority of leveraged loans relative to high yield, but that concern is heavily overblown. With lev loan funds having 21 straight weeks of outflows, you can buy knowing that additional selling pressure should be minimal. -- I like collateralized loan obligation (CLO) funds (I've mentioned the Palmer Square fund in the past) and business development corporations (VanEck Vectors BDC Income ETF , for example) which are themselves leveraged lenders. -- Investment-grade bond funds are about as close to neutral as you can get. Credit risk is lower than high yield, but interest-rate risk is higher. I wouldn't sell those funds here, but I wouldn't add, either. -- On the stock side of the equation, I would sell Utilities (Utilities Select Sector SPDR Fund ) and buy MLPs (look for individual companies as the ETF, Alerian MLP , is problematic for a number of reasons.) -- I'd be taking profits in dividend funds (just reducing risk, not exiting completely). I think the low volatility funds should be sold, because if we are near an inflection point, they will underperform on the upside, and more importantly, we will be reminded that all stocks are under pressure when the market sells off, with low vol and min vol funds being no exception. -- Sell emerging markets, muni and Treasury funds. For me, the muni funds are too exposed to interest-rate risk. At the risk of sounding confused, I'm OK adding to muni CEFs, but only because their discount to net asset value (NAV) is still greater than 10% in many cases. If you own munis, consider shifting to the CEFs. As for emerging markets, with so many dark spots across the world, I can't get comfortable (Turkey and Ukraine) and I am nervous about global trade which would also hurt EM more broadly. Despite the Fed turning dovish, so much is priced in, so I'd sell Treasury funds. As a reminder, I hate iShares Core U.S. Aggregate Bond ETF and Vanguard Total Bond Market Index Fund ETF Shares (or any other all bond funds) as I think with some effort you can easily outperform those benchmarks, which continue to suck up investor money.

How to Allocate Your Income-Generating Assets Now

My 'Hopium/Doomium' model has stood the test of time.

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