Dialing Down Risk

STWD: Reduced Allocation from 4.33% to 2.36%

Starwood Property Trust’s dividend history goes back to 2009 with no dividend cuts; a big plus. Over the past year the performance has been lackluster, and I prefer my larger allocations to be funds rather than individual companies, to spread out the risk. Additionally, STWD was poised to benefit from falling interest rates, and the future direction of interest rates is unclear.

Still a reliable payer, but not worthy of 10 top status in the portfolio.

SVOL: Reduced Allocation from 4.13% to 2.16%

SVOL has underperformed recently for 2 reasons. 1/ Every time the Fed cuts rates, the income from the credit funds and treasuries it holds produce less income. The result is a reduction in distributions. 2/ It performs well during low volatility periods and recently, volatility has increased. 

Given the possibility that volatility will remain high during a change of administrations, I’m reducing exposure to SVOL.

RC: Sold (0.41% Allocation)

No other way to say it… this was my dud for 2024. Mortgage REITs are notoriously risky, and this one is no exception. Given the risk, my allocation was tiny, so it didn’t have much impact on the portfolio.

CSWC: Increased Allocation from 2.18% to 3.22%

Capital Southwest was priced for perfection with a valuation peaking at more than 1.6 times Net Asset Value. The last earnings call included an increase in non-accural loans (loans in arrears) from 2.3% to 3.5%. The market didn’t like hearing that! 

This recent video explains it in more detail. CSWC is still not cheap, but a quality company like this (it outperformed the S&P 500 over the past 10 years for total return), is almost always expensive.

JBBB: Increased Allocation from 1.04% to 4.33%

While interest rates remain relatively elevated, JBBB offers a decent yield. More importantly, the volatility is very low. If you’re nervous about the market, check out its sister fund, JAAA. It doesn’t pay as much as JBBB, but the volatility is almost zero.

At 7.6%, JBBB’s yield is slightly less than the 8% I typically look for, but it’s quite attractive at the moment, given the relatively low risk. If the Fed continues to cut rates, the income from CLO funds like this will drop, and they’ll be less compelling. For now, I like the stability.