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2018-01-15 PIP Quarterly Year End Update



January 15, 2018

Dear Mr. and Mrs. Smith,

The Preferred Income Portfolio (PIP) marked its 9th year in 2017. PIP was created in 2008 as the Federal Reserve reduced interest rates. TIA know its clients needed quality consistent income from their fixed income investments along with lower volatility than the stock market. Investing in $25 preferred shares provided the needed income with their 6% or greater coupon rate and low price volatility. Additionally, their above market interest rates increased their probability of being called as issuers rushed to take advantage of low market rates. This simple concept has served us well.

So now it's 2018. Interest rates have quit falling, although they haven't risen much either. The Federal Reserve has at least three interest rate hikes planned for this year and the market hasn't ruled out a fourth. Could this be the time for us to place our fixed-income investments in some other security?

This requires an analysis of the market as it progressed through 2017. The 10-year Treasury started 2017 yielding 2.45%. The Federal Reserve raised interest rates three times for a total of 0.75% in raises. The 10-year Treasury ended 2017 yielding 2.41%, a decrease in rate. Corporate bonds don't seem to be the answer either. The Barclays BBB US Corp Index started 2017 yielding 3.72% and finished the year at 3.60%. The Federal Reserve has had an effect on short-term (2 to 5 year) rates but all others have stayed stubbornly low. This probably reflects the lack of inflation in the economy, but regardless of the cause, it reinforces that PIP remains an effective Bridge to Higher Interest Rates. PIP still produces 6% to 7% annual income while enjoying lower price volatility than the general stock market. Remember, we are not required to do anything to keep collecting our dividend income. If rates continue to be low we will undoubtedly have some inssues called. As long as we maintain coupon rates and purchase price discipline on our replacement issues we can continue to maintain the portfolio.

In 2017, PIP began the year with an average coupon rate of 6.82% and average share price of $25.98 and ended the year at 6.87% and 26.18. PIP ended 2017 with 34 months of call (income) protection. While we will continue to evaluate our options, 2018 does not look like the year when fixed-income alternatives will replace PIP as our fixed income strategy.

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


J. Ronald DeLay

President & CEO

Manager Preferred Securities

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