In my search for yield, I found some insider buying in closed end fund HSM. HYPERION STRATEGIC MORTGAGE INCOME FUND.
Trades at a slight discount to its net asset value and yields somewhere in the 7-8% range. (I get a different yield than the company which makes me wonder if they only pay 11 dividends a year ?)
They recently CUT their dividend from 10.8 cents to 9 cents per month. Since the day they announced the cut, HSM has had 7 insider buys.
Comments encouraged as this whole "income investing" is pretty new to me.
The Hyperion(R) Strategic Mortgage Income Fund, Inc. Dividend Declaration August 5, 2005
NEW YORK--(BUSINESS WIRE)--Aug. 5, 2005--The Board of Directors of the Hyperion Strategic Mortgage Income Fund, Inc. (the "Fund") (NYSE:HSM) declared a monthly dividend of $0.090 per share, payable on August 25, 2005 to shareholders of record on August 16, 2005. The ex-dividend date is August 12, 2005. Based on the NYSE closing price of $13.68 on August 4, 2005, the Fund's yield was 7.20%. Based on the net asset value per share of $14.24 on August 4, 2005, the yield of the Trust was 7.58%. As of July 31, 2005, the portfolio's average duration, as measured on a net assets basis, was 3.6 years; the average duration of total assets was 2.4 years; and leverage equaled 32.8%. Sixty-seven percent of interest rate risk due to leverage is hedged using interest rate swaps and floating rate securities that have a weighted average life of 2.9 years.
Portfolio of Investments as of July 31, 2005
Sector Allocation as a Percentage of Total Assets
Non-Agency Residential Mortgage-Backed Securities ("MBS") 19.7%
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Commercial MBS 17.7%
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Agency MBS Pass-throughs 42.4%
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Asset-Backed Securities 15.5%
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U.S. Treasury and Agency Securities 4.7%
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Credit Allocation as a Percentage of Total Assets
U. S. Government / Agency and AAA Rated 52.1%
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AA Rated 1.2%
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A Rated 8.2%
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BBB Rated 20.3%
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Below Investment Grade 18.2%
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DOLAN, JOHN HERBERT CIO 08/24/2005 Form 4 B D 4,500 $13.463 7,300
LAI, CLIFFORD E. PR 08/16/2005 Form 4 B IN 1,900 $13.580 20,675
LAI, CLIFFORD E. PR 08/15/2005 Form 4 B D 275 $13.500 9,875
LAI, CLIFFORD E. PR 08/15/2005 Form 4 B IN 8,900 $13.490 18,775
DOLAN, JOHN HERBERT CIO 06/27/2005 Form 4 B D 500 $13.750 2,800
LAI, CLIFFORD E. PR 06/21/2005 Form 4 B D 3,600 $14.000 9,600
FEENEY, JOHN JAY JR. DIR 06/20/2005 Form 4 B D 1,500 $14.000 9,063
FEENEY, JOHN JAY JR. DIR 05/03/2005 Form 4 B D 1,775 $14.120 7,563
SYAGE, JOSEPH S. DIR 03/30/2005 Form 4 B D 300 $13.650 5,500
BORDNER, GREGORY S. 03/28/2005 Form 4 B D 2,625 $13.500 2,625
FEENEY, JOHN JAY JR. DIR 03/28/2005 Form 4 B D 2,538 $13.550 5,788
WALSH, LEO M. JR DIR 03/23/2005 Form 4 B D 10,000 $13.570 20,000
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Report of the Investment Advisor
For the Six Months Ended May 31, 2005
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Dear Shareholder:
We welcome this opportunity to provide you with information about The Hyperion Strategic Mortgage Income Fund, Inc. (the “Fund”), for the semi-annual period ended May 31, 2005. The Fund is a closed-end bond fund whose shares are traded on the New York Stock Exchange (“NYSE”) under the symbol “HSM”.
Description of the Fund
The Fund is a diversified closed-end management investment company. The Fund’s primary investment objective is to provide a high level of current income by investing primarily in mortgage-backed securities that offer an attractive combination of credit quality, yield and maturity. The Fund’s secondary investment objective is to provide capital appreciation. Under normal market conditions, the Fund will invest at least 80% of its total assets in investment-grade mortgage-backed securities (“MBS”) including agency MBS, non-agency residential MBS (“RMBS”), and commercial MBS (“CMBS”), and may invest up to 20% of its total assets in U.S. Government securities, cash or other short-term instruments.
Portfolio Performance
For the six month period ended May 31, 2005, shareholders realized a total investment return of 5.54%, which assumes the reinvestment of dividends and is exclusive of brokerage commissions. Based on the NYSE closing price of $14.74 on May 31, 2005, the Fund’s shares had a current yield of 8.8%.
As of May 31, 2005, the Fund, inclusive of the effect of leverage, was managed with an average duration (a bond’s duration is the weighted average number of years until maturity of all its cash flows, including coupon payments and principal) of 3.1 years, as measured on a net asset basis.
Market Environment for the Semi Annual Period Ended May 31, 2005
Sometimes the markets respond to economic factors (fundamental valuation). Sometimes the pendulum swings to the other extreme and the markets respond to other market factors such as supply and demand and the relative ability and willingness of market participants to utilize leverage. So far in 2005, technical factors seemed to be dominating, both for credit spreads and the level of interest rates.
The economic numbers reflected an economy that continues to expand at a moderate pace. The consumer remains very healthy with home prices driving wealth thanks to stubbornly low long term interest rates and the advent of interest only and longer amortizing mortgages. Inflation indices have remained low thanks to the outsourcing of goods and services to low cost producers like China and India, a trend we expect to continue for the foreseeable future. Rising oil prices are definitely a problem for the economy and we believe that it will lead to a slowdown in the economy in 12 to 15 months.
We feel that the dominant factor that will drive the continued decline in long term interest rates is the consumer. With the consumer being over 67% of Gross National Product, interest rates should remain consumer-friendly, i.e. keep mortgage rates attractive for home ownership since the home is the largest asset for the consumer. As a result, the goal of monetary policy in a recession will be to drop interest rates low enough to cause a mortgage refinancing wave to put money in the pocket of the consumer to therefore spend back into the economy. As long as the consumer is such a dominant force of Gross Domestic Product, this cycle will continue to drive long term interest rates lower.
The yield curve, as measured by the difference in interest rates between the UST 10-Year and 2-Year narrowed from 114 basis points to 34 basis points. We believe that the yield curve will continue to flatten and potentially invert where the yield on shorter maturity assets are higher than that of longer maturity assets. We anticipate that the Fed will raise Fed Funds to 3.25% at the upcoming June 30 meeting and then at least once again during the fall to 3.50%. At that point a yield curve with the 2-Year at 3.70% and a 10-Year at 3.95% would not be inconsistent if the markets begin to believe that the Fed is near the end of the tightening cycle. The yield curve inversion scenario would play out if the Fed raises the Funds target beyond 3.50%.
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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Report of the Investment Advisor
For the Six Months Ended May 31, 2005
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Portfolio Strategy for the Semi Annual Period Ended May 31, 2005
Credit sectors, especially corporate bonds, came under some pressure over the last few months. Much of the pressure was concentrated in the corporate sector with the BB rated sector widening dramatically, triggered by a ratings downgrade of General Motors and Ford. Weakness in the overall corporate sector spilled into the CMBS sector with the BBB-rated classes widening about 20 basis points. The residential credit sector escaped the underperformance as the combination of large sums of money pre-committed for RMBS investment and the beneficial impact of lower interest rates on home prices and structural deleveraging kept yield spreads firm.
As the credit curve has narrowed in the RMBS market, we have reduced AA through BBB rated bonds in the sub-prime sector by 7.7%. The proceeds were reinvested primarily into the premium-priced Agency MBS sector (+6.5%). The bonds that were sold were largely floaters and the bonds that were purchased have limited sensitivity to interest rates, so the overall effective duration of the portfolio did not change dramatically. These trades resulted in the AAA rated allocation rising from about 47% to 53.7%. This is temporary, as over time we expect to redeploy those funds back into BBB rated bonds across the RMBS, CMBS and ABS sectors should yield spreads widen.
The allocation of below BBB rated exposures fell slightly from 17.5% to 17.0% as deals were prepaid, called, or upgraded to investment-grade. There were no material changes within the below-investment-grade exposures. Within the below-investment-grade sectors, we remain heavily skewed toward RMBS. Over time, we hope to add to the CMBS sector through an allocation to rated B-Notes.
We remain nearly fully leveraged to take advantage of the steepness in the yield curve, but are maintaining greater than 75% of the leveraged portion of the Fund in floaters or hedged with interest swaps out to approximately 2.3 years.
The duration of the Fund has been running between 3.0 and 3.5 years. We expect the duration to drift up slightly should interest rates rise and mortgage prepayments slow, but are comfortable that the duration will not extend dramatically.
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Report of the Investment Advisor
For the Six Months Ended May 31, 2005
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Conclusion
We remain committed to the Fund and its shareholders. As always, we will continue to actively seek investment opportunities in the market and act on them in a timely fashion in an effort to achieve the Fund’s objectives. We welcome your questions and comments, and encourage you to contact our Shareholder Services Representatives at 1-800-HYPERION.
We appreciate the opportunity to serve your investment needs. |
