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2017-10-15 PIP Quarterly Update

October 15, 2017

Dear Mr. and Mrs. Smith,

I drive a pickup truck. I drove my last pickup 15 years. Toward the end, it started sending me signals that it was going to require more expense to keep it functioning than I was willing to spend, so I traded it off. My new truck has seating for 5, all the luxury you’d like in the cab, and a bed suitable for hauling about anything a suburbanite could imagine. It has a rugged frame and four wheel drive for when conditions are bad, with large tires that cushion the ride over bumps and potholes. It is truly a hybrid vehicle.

The Preferred Income Portfolio (PIP) is the pickup truck of the investment world. The size of the issues along with their exchange listing assures there is room for investment. Their 6% to 7% coupon income carries the load of high yield. TIA’s equity selection process is the rugged frame wupporting the lasting value of our preferreds. The size of the companies we invest in and the spread between our preferred coupon rates and the underlying market rate are the four wheel drive and large tires that smooth out changing market conditions. The call period gives us a “warranty” on rate changes, and the call date helps assure us value when it’s time to trade.

So how’s our “truck” running? At the end of the third quarter, PIP had an average annual coupon income of 6.86% with an average 37 months of income protection. Our average issue price of $26.84 (reinvestment cost) gives us a current yield of 6.39%; over 3.5% greater than the current U.S. 30-year Treasury Bond, while our yield-to-call is more than double the 5-year U.S. Treasury note. By these measures, PIP remains a solid fixed-income investment strategy.

Investors are nervous that recent actions by the Federal Reserve (Fed) will raise interest rates dramatically and “crash” our fixed income strategy. However, if you watch what they do rather than what they say, you get a different picture. Last year, the Fed announced they would raise rates two to four times in 2017. So far, the Fed has raised rates once, with one more raise likely. Yes, interest rates are higher now than they were all summer; however, they are lower than they were to start 2017. TIA believes interest rates will rise slower as global constraints keep rates low. Even the Fed predicts an interest rate of 3% by the end of 2018. At most, this amounts to a leaky tire on our PIP “truck,” not a crash. In a slowly rising rate environment, we can continue to roll out of issues as they approach call date and reinvest in higher rate issues when they become available.

TIA continues to believe that PIP represents an adaptable, versatile, and successful fixed income strategy. Our “truck” has a few years on it, but is running smoothly, and we will continue to drive it for the foreseeable future.

Thank you for your investment confidence, and we welcome your calls about your account.

Sincerely,

J. Ronald DeLay
President & CEO
Manager Preferred Securities

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