What I Learned from Steven Bavaria—and What Was Still Missing

When I study other income investors, I am not looking for someone whose portfolio I can copy.

I am looking for principles.

Which ideas remain useful when the market changes? Which habits help an investor continue collecting income during difficult periods? And which parts of someone else's method fit the way I want to manage my own portfolio?

Steven Bavaria has given me several valuable answers to those questions.

His Income Factory philosophy taught me to look at credit differently, to focus more on the cash output of a portfolio and to worry less about its day-to-day market value.

But his work also helped me identify something I was still missing: a simple, repeatable way to evaluate whether an individual ticker remains a durable income asset.

That missing layer eventually became Income Quality Score.

A Credit Investor Sees a Different World

Bavaria's preference for credit is hardly surprising.

His career was built around banking and credit. He worked at Bank of Boston and Standard & Poor's and has spent decades analysing borrowers, loans and credit structures. His investment philosophy is therefore rooted in a lender's view of the world.

An equity investor usually asks:

How much can this company grow?

A credit investor asks a different question:

Is this borrower likely to keep paying its obligations?

That difference matters.

For an equity investment to deliver a strong return, the underlying company may need to grow its revenue, earnings and valuation. A loan does not require the borrower to become the next great growth company. The borrower mainly needs to remain operational, pay its interest and eventually repay or refinance the principal.

The hurdle for success can therefore be lower.

Bavaria regularly makes the point that most borrowers in a diversified credit portfolio continue paying. Defaults do happen, particularly during recessions, but they are the minority outcome. Even when a loan defaults, lenders may recover a meaningful part of their principal because they rank ahead of equity owners and, in the case of secured loans, have claims on specific assets.

In one public discussion, Bavaria referred to typical portfolio default rates of roughly 1% to 2% and recoveries of 50% or more, although actual outcomes naturally depend on the economic cycle, credit quality and loan structure.

That does not make credit risk-free.

It means credit risk should be evaluated as credit risk—not treated as though every below-investment-grade borrower is destined to fail.

The Portfolio as a Factory

The most memorable part of Bavaria's philosophy is his factory analogy.

When a company builds a factory, management does not plan to sell the building every afternoon. The factory exists to produce something.

Its daily market value is therefore less important than its output.

Bavaria applies the same idea to an income portfolio. The portfolio is the factory. Interest and distributions are its output. Reinvesting part of that output adds new machines to the factory, which can then produce even more income.

This changes the investor's focus.

Instead of asking whether the market value of the portfolio increased this month, the investor can ask:

• How much income did my portfolio produce?
• Is that income still supported?
• How much of it did I reinvest?
• Is my future income capacity growing?

I find that perspective powerful.

A falling share price is psychologically difficult when capital appreciation is the main source of the expected return. But when an asset continues producing income, a lower price may allow distributions to be reinvested at a higher yield.

That does not make every price decline an opportunity. Sometimes a falling price is warning investors about a genuine deterioration.

But Bavaria's framework helped me stop treating price volatility itself as proof that an income strategy had failed.

Sixty Positions Can Be Enough

Another aspect that stands out is the relative size of Bavaria's personal portfolio.

Recent descriptions put it at more than sixty positions across CEFs, BDCs, REITs, ETFs, MLPs and other income-producing assets.

That is diversified, but it is still a manageable portfolio.

It allows him to spread credit and manager risk without creating an inventory of hundreds of independent holdings. His approach is predominantly buy-and-hold: select experienced managers and credit platforms, collect the income and allow reinvestment to do much of the compounding.

This is completely different from what I learned from Steve Selengut.

Selengut operates with a much larger collection of CEF positions and lots. That scale supports a more active process. With so many positions, there are almost always profitable lots available to sell. Profits can be harvested and the capital redeployed into assets that are temporarily below their cost basis.

The two portfolio structures serve different operating models.

Bavaria's portfolio is primarily designed to hold, distribute and compound.

Selengut's portfolio is designed to create frequent opportunities for active profit taking and reinvestment.

Neither structure is automatically better.

The important lesson is that portfolio size should follow the process. A sixty-position buy-and-hold portfolio and a portfolio containing hundreds of actively managed lots should not be judged using exactly the same operating metrics.

What I Learned from His Monthly Commentary

I have learned a great deal from Bavaria's portfolio choices and monthly commentary.

He does not look only at the stated yield of a fund. He pays close attention to the organisations managing the underlying assets.

In credit investing, the platform matters.

A strong credit manager needs sourcing capabilities, underwriting discipline, restructuring experience and access to borrowers. The manager must decide not only which borrowers deserve capital but also how a loan should be structured, where it ranks in the capital stack and what protections lenders receive.

Bavaria has also helped me better understand instruments I previously found difficult to evaluate, including senior-loan funds, high-yield bond funds, BDCs and CLO-related investments.

Perhaps most importantly, he made credit feel less mysterious.

These assets are not simply collections of dangerously indebted companies. They are portfolios of contracts, cash flows, collateral, seniority levels and risk premiums. Those elements can be examined and diversified.

The Question I Still Could Not Answer

Despite everything I learned, I continued to struggle with one practical question:

How do I consistently evaluate whether a particular ticker is a durable income asset?

A manager may have an excellent reputation.

An asset class may have attractive long-term characteristics.

A fund may own hundreds of loans, reducing the impact of any single default.

But that does not automatically mean its distribution is durable or that its shareholders' capital is being preserved.

A fund can still:

• pay more than its portfolio earns;
• gradually erode its net asset value;
• use leverage that amplifies a difficult credit cycle;
• maintain an attractive distribution while its underlying income capacity weakens;
• or appear healthy because its headline yield hides longer-term deterioration.

Narrative research is valuable, but it can be difficult to apply consistently across many tickers.

One analyst may emphasise the manager. Another may focus on the discount. A third may concentrate on recent distribution coverage. All three may be making valid observations, but the investor is still left to combine those observations into a repeatable decision process.

I wanted a common measuring system.

Not a prediction of next month's price.

Not a list of securities that everyone should buy.

A way to evaluate the quality behind the income.

Why I Created Income Quality Score

That is why I created Income Quality Score.

The purpose of the IQ Score is to add a consistent measurement layer to income investing.

It asks whether the evidence behind an income asset supports the idea that it can remain a durable source of portfolio income. It then classifies that asset as a Friend, a Question Mark or a Foe.

A Friend is not guaranteed to rise in price.

A Foe is not guaranteed to cut its distribution tomorrow.

The classifications are a structured way to separate stronger income characteristics from weaker ones and to identify where additional investigation may be required.

Income Quality Score does not replace the work of investors such as Steven Bavaria.

It builds on what I learned from them.

Bavaria taught me that credit deserves a serious place in an income portfolio. He taught me that portfolio output can matter more than daily market value. He also showed me why reinvestment can create growth even when the underlying assets themselves produce little capital appreciation.

Income Quality Score addresses the next question:

Is the individual asset I am adding to my factory still capable of producing durable income?

That is the question I want to answer before committing more capital—and while deciding whether an existing holding still deserves its place.

Different Methods, Shared Objective

Steven Bavaria, Steve Selengut and Income Quality Score do not represent identical investment methods.

Bavaria emphasises credit, cash output and long-term compounding.

Selengut emphasises working capital, active profit taking and the redeployment of realised gains.

Income Quality Score focuses on evaluating the durability and quality of the underlying income assets.

But the objective is shared:

To build a portfolio that can continue producing dependable income over time.

There is no single correct way to construct that portfolio.

The real mistake is building one without knowing what its operating system is supposed to do—or without measuring whether the assets inside it are still doing their job.

See where your income assets stand. Explore how hundreds of CEFs, BDCs, ETFs and REITs are classified as Friends, Question Marks and Foes—and read exactly how each score is built.

Explore IQ Scores → · Read the methodology

This article is for informational and educational purposes only. It does not constitute personal investment advice or a recommendation to buy or sell any security.