I had no insight into this particular stock, I didn’t write about it but (repeated for emphasis) this is a story we’ve seen before. Investors are desperate for yield and many of these offer the right buzzwords; yield, cash flow and low correlation to equities.
An ongoing theme here has been that the further you move from plain vanilla yield, the more risk you take and while this should be obvious it is often forgotten when it comes to sizing of these sorts of products in portfolio. Four years ago 20% in gold/commodities was a popular suggestion which now seems unbelievable and maybe anyone making that suggestion back then would try to deny it now.
Suggestions today about how much to allocate to things like high yield or other sources of yield like maybe MLPs could take a similar path. That is not offered as a prediction, it is a comment about how to think about and allocate risk.
A 2008-like widespread malfunction is an incredibly low probability but some sort of calamity in one pocket (think CanRoys in October, 2006) can of course come at any time. While this is not new it is often forgotten or ignored (repeated for emphasis). Small exposures to these yield plays can make sense but you will not get 5% out of your entire income portfolio in a zero percent world without a lot of risk. There is no way to know whether there would be any consequence for that risk if taken but of course it there would only be regret in the face of a blowup.
This article was written by AdvisorShares ETF Strategist Roger Nusbaum.