QF Yield Fund, LP 4th Quarter update

I am posting the quarterly update for the dividend fund my team and I run. We today have a net of fees yield of 10% to our investors. Unlike the "growthy" side of the equity markets, dividend names topped out and have not reached their 2015 peaks. Yields are large, valuations are low and we are hopeful that we can deliver cap gains as well as income going forward. (My lawyer asked me to tell you that this is not a solicitation for any investment, he is adamant that solicitation can only be made by prospectus, so keep that in mind.)

QF Capital, LLC January 2020

The QF Yield Fund 4th Quarter Update 2019

Dear Partner:

The QF Yield Fund, LP gained 0.39% in the fourth quarter of 2019. For the year the Fund has returned just under 10% (9.91%) net of all fees and expenses. Approximately 90% of that return was from dividend income. Our extremely diversified portfolio of (nothing but) publicly traded equities currently yields over 9% net to investors.

For the quarter, significant sell-offs in Oct. and Nov. were more than erased by gains in Dec. The consistency for the quarter and the entire year has been the inflow of reliably high dividend income. To note and by design, the dividends have been dependable since our Fund’s inception in 2009.

It is our opinion that many of the “high yielding” equities in our investment universe are “fully valued.” Certain parts of this universe, such as large cap mortgage REITs and BDCs are in fact expensive. Some trade at a premium to book value and yield single digits. Traditional property REITs are mostly no longer cheap in our estimation. Many have increased in price and now trade with yields below 4%. We don’t find these names compelling and don’t own them at this time.

However, there are still plenty of inexpensive equities with high yields that cash flow or earn their dividends. MLPs have never really recovered from their commodity induced sell-off of 2015 but continue to crank out dividends. Small cap BDCs have not participated in the rally bestowed on their larger brethren. There are also quaint pockets of value such as private prison REITs that are out of fashion due to political disfavor despite excellent business prospects.

We have specific metrics for identifying value opportunities in the market, and currently our screens are giving us plenty of choices. Given the options with many companies in different business lines, we see no reason to take significant single stock (or for you MBA graduates, idiosyncratic) risk. We currently own over 80 stocks with no one position currently representing more than 1.5% of the portfolio. To some, this might feel like a large number of names, but we see advantages in spreading out the stock risk as long as all the names are contributing to our goal of dividend income. There is probably even room for more as long as we find other equities with high yields, earning or cash flowing their dividends, selling for a single digit multiples and, in our estimation, having reasonable business prospects.

The vast bulk of this year’s return came from dividend income. We believe that many of the names we own have never truly recovered from sell-offs in 2015 and 2018. In our opinion, future periods could see the Fund benefit from more favorable valuations (or

capital gains) in addition to dividends. Nevertheless, we are highly confident (but obviously cannot guarantee) that the vast bulk of our portfolio names will continue to pay their hefty dividends in 2020. Undoubtedly, there is much less certainty about when an improved valuation cycle might hit, but color us delighted if we reap another year of steady income while getting “paid to wait.”

Steve Massocca

P.S. A Note to “tax efficiency”, many of our dividends are “qualified” for tax purposes and enjoy a lower tax rate. In addition we own several MLPs whose distributions are often considered “return of capital” for tax purposes and have other esoteric benefits for taxable investors such as depletion etc. Further it should be noted that, last year, investors in our Fund received exposure to more than 20 MLPs yet only receive one K-1. Finally given the large number of names in our portfolio and the ability for us to easily move money from one “cheap” name to another, we are able to realize capital losses throughout the year with (in our opinion) no investment impact. As a result for every dollar of returns this year we also pass along to our investors approximately 50c in capital losses for tax purposes. We believe the Fund is “tax efficient”.