It isn't every day that you can get a bond fund manager to elaborate on a portfolio's equity exposure, but the IMS Strategic Income Fund (IMSIX) isn't exactly your garden-variety income fund.
“We're looking at anything that produces income,” said Carl Marker, the fund manager since it was launched in November 2002 by IMS Capital Management Inc. of Portland, Ore. “We include equities in this fund because we want to outperform the typical income fund.”
The $113 million fund has grown from $60 million a year ago and $30 million two years ago.
The appeal, from Mr. Marker's perspective, is the delivery on a promise of average annualized returns of about 10%.
“We've always told investors that they can count on between 6% and 7% yield, and hopefully another 2% capital appreciation on top of that,” he said. “Right now, our yield is closer to 8%, and we try to get closer to a 10% total return.”
A key component of the strategy is diversification, which includes exposure to a broad range of fixed-income investments but also up to a 20% weighting in stocks. The fund currently has an 8% exposure to equities.
“When it comes to common stocks, we're looking for a high-dividend-paying company with some stock performance upside,” Mr. Marker said. “We want at least a 3% dividend payout in a stock.”
Current examples include a couple of shipping companies that are poised to benefit from increased demand for raw materials from booming economies such as China's.
New York-based Eagle Bulk Shipping Inc. (EGLE) pays a 7.6% dividend yield, and Glyfada, Greece-based Quintana Maritime Ltd. (QMAR) pays a 10% dividend.
Through Friday, Eagle shares, which closed a $25.74, were up 58.4% since the start of the year.
Quintana shares closed Friday at $19.07, up 82.1% so far this year.
The Standard & Poor's 500 stock index, meanwhile, had gained 7.6%.
The fund's overall strategy is designed to be fluid and flexible, taking into account a full range of investment options and weightings in everything from international stocks and bonds to reverse convertibles, income trusts, real estate investment trusts, energy trusts and business development companies, Mr. Marker said.
The portfolio is bumping up against its own exposure limits with a maximum 25% international weighting and a 42% exposure to high-yield bonds, just shy of the 45% limit.
Mr. Marker described the strategy as a “kinder, gentler approach to high-yield investing,” despite the current weighting in high yield.
“We don't own high-risk securities,” he said. “There's no leverage or exposure to the subprime-mortgage or distressed-debt markets.”
Mr. Marker, who described himself as an “opportunistic stock picker,” is the ultimate manager of the fund. But the five-person team also includes Don Shute, the dedicated fixed-income manager, and Joe Ledgerwood, the lead equity analyst.
“This is definitely about security selection, and not just swinging the bat and taking huge risks,” Mr. Marker said. “We're willing to get more conservative, and it's not out of the question for us to have a 50% weighting in investment-grade bonds.”
The fund currently has a 12% weighting in such bonds.
Said Mr. Shute, “If you're trying to produce income, the exposure to fixed income will always be higher than the exposure to equities, and as an income fund we need a payout that's higher than money markets in order to be competitive. The advantage of having a wider universe to pick from is that there are a lot of ways to invest in different companies and different sectors.”
Another aspect of the fund's potentially broad diversification is that it essentially leaves the technical decisions to the portfolio managers, as opposed to the financial advisers who are trying to determine where the best income opportunities exist at any given moment.
“Most advisers have to make the decision about buying a REIT fund or a muni fund, but this fund lets us make that call,” Mr. Marker said. “Depending on a client's risk profile, the advisers can make the decision about how much a client should be allocated to higher-yield and reasonable volatility.”
Through Thursday, the fund, which has a five-star rating from Morningstar Inc. of Chicago, was down 3.3% year-to-date.
Last year, the fund gained 17% and ranked in the second percentile of funds in the same Morningstar category. The 2006 return compared with an 11.9% gain by the S&P 500.
Through Thursday, the fund's three-year annualized total return was 10.4%, ranking it in the fifth percentile of the Morningstar category.
Questions? Observations? Stock tips? E-mail Jeff Benjamin at jbenjamin@crain.com.
