For the first half of 2016, the Durable Income Strategy performed well in a volatile market environment. Durable Income generated a 9.48% net return vs the Barclays High Yield Index Benchmark return of 9.06%. Since inception (June 1, 2014), Durable Income has generated an 11.10% cumulative net return vs the Barclays High Yield Index’s cumulative return of 2.06%. Durable Income invests in exchange traded, income oriented securities with an underlying goal of generating above market income while avoiding permanent asset impairment. Since seeding the strategy, the portfolio managers have added new capital.
As of June 30th, Durable Income was generating an attractive 7.37% net yield (net of management fee) and the portfolio was priced at a weighted average price to book value of 89.5% 1 . The second quarter started off on stable footing as we came out of the first quarter downdraft driven by fears of rising interest rates. As the second quarter progressed, the market began to conclude that the Fed was going to raise interest rates over a longer, slower trajectory relative to previous market expectations. This helped drive demand for income producing securities. Late in the 2nd quarter, we had the Brexit vote which broadly increased demand for US fixed income oriented assets. The portfolio has generally benefited from these events.
We continue to believe that Durable Income is a compelling long term story given its diversified portfolio of well-structured entities trading at a discount to book value and the overwhelming majority of the portfolio’s underlying assets hold a par claim. RVP’s overriding risk management theme is anchored around prudent interest rate and credit risk while understanding an entities’ structural protections and financing terms. In short, we want to avoid entities with good underlying assets that might suffer permanent impairments due to poor liability structures. It is our belief that over time, well underwritten assets with good capital structures, purchased at a discount, earning substantial positive carry, will generate attractive long term, risk adjusted returns.