Seeking Consistent Absolute Returns with a Unique Strategy
The Essential Absolute Return Portfolio seeks a return that significantly exceeds the prevailing level of short term interest rates by investing primarily in open and closed end funds for a combination of current income and short term capital appreciation. Limiting the risk of loss of principal is a secondary objective.
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An Attractive Alternative to Traditional Fixed Income Investing
The Essential Absolute Return Portfolio is designed to be a substitute for traditional core fixed income holdings in a client portfolio. The portfolio is constructed in four components: (1) closed end funds (CEFs) which are now or may in the future undergo a corporate action; (2) closed end funds selected for attractive discounts to net asset value (NAV) which we expect will narrow; (3) open and closed end funds with absolute return investment objectives; and (4) open and closed end funds with fixed income investment objectives. The percentage devoted to each of these components will vary over time, depending on the relative attractiveness of each and the supply of opportunities available in the closed end fund market.
Diligent management of the closed end fund positions seeks to limit the interest rate risk inherent in traditional bond portfolios through a tactical approach that focuses on reaping short term capital gains or earning an attractive level of income while waiting for capital gain opportunities to arise. Because many of these investment opportunities have short lives and may be “self-liquidating,” portfolio turnover will be relatively high.
Composite Total Returns for Periods Ended September 30, 2017
Extracting Value from Closed End Funds
Closed end funds are often inefficiently priced due to limited liquidity, market participants’ lack of understanding of the funds’ characteristics and underlying holdings, and a dearth of published research on CEFs, among other factors. Essential Investment Partners has extensive experience in the CEF market. By investing in CEFs that have attractive underlying assets, but trade at a significant discount to the actual value of their holdings (net asset value), we strive to provide our clients a unique combination of income and capital appreciation potential.
Key Portfolio Information
Researching Each Investment Carefully
The process for finding, evaluating and investing in CEFs is labor intensive. New investment ideas are typically generated from our own research and diligence in following the CEF market. Once a prospective opportunity is identified, the research process is both thorough and expeditious. We must be thorough to ensure that all of the parameters and risks of an opportunity are understood. And we must be expeditious because most opportunities are short term in nature, often playing out over several weeks or a few months.
Continuing diligence is required to ensure that the events surrounding each investment unfold as anticipated and, if there is a delay or change, we adjust the investment strategy accordingly. Finally, adept trading is a critical part of the execution of each investment as trading volume in the CEF market is often thin so executing trades at the desired price points takes a great deal of time and care.
Seeking a Desirable Risk/Return Trade-off
This strategy may be suitable for clients seeking an alternative to traditional fixed income investments, with less downside risk. While we seek to limit downside risks, this strategy does involve risk, including the possibility of a substantial loss of principal. In particular, CEFs trade like stocks on an exchange, are subject to liquidity issues and commission costs and may incur leverage that amplifies volatility in the share price. Therefore, there is no guarantee that management will achieve its objectives for the Essential Absolute Return Portfolio.
Composite returns are calculated as time-weighted total returns, reflecting the reinvestment of dividends and capital gains, the effects of cash holdings and the deduction of brokerage commissions on transactions. The composite was launched March 31, 2009. “EARP Gross” means the total return composite for the Essential Absolute Return Portfolio without the effect of management fees charged by Essential Investment Partners, LLC (EIP). “EARP Net” reflects the EARP Gross returns adjusted the effect of charging fees to each account in the composite. Performance prior to 1/1/2011 reflects a hypothetical fee based on EIP’s standard fee schedule of 1% of assets per annum up to $2 million, 0.75% of assets per annum on the next $3 million of assets and 0.50% of assets on assets in excess of $5 million, billed quarterly in arrears. This is the highest fee schedule charged to any client using the Essential Absolute Return Portfolio. Performance from 1/1/2011 reflects actual fees charged to clients. Actual fees may vary depending on the applicable fee schedule, portfolio size and other factors. The composite contains all accounts which are or were managed as standalone portfolios using this strategy. The portfolio management team changed in March, 2011 and in October, 2015. Past performance does not guarantee future results.
Because of differences in timing of cash availability and investment opportunity availability, holdings may vary significantly among client portfolios. The information above is for illustrative purposes only; nothing contained herein is intended as investment advice or an opinion regarding the appropriateness of any investment, or a solicitation of any type.
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