Our objective is to proactively provide a mix of fixed income securities that offer current income consistency and opportunistic growth potential. We analyze security structure, the yield curve, interest rate trends, and arbitrage potential.
Managing Duration
Investors typically receive extra return by extending out to longer maturity securities (this tactic can also improve income stability). Active management can improve performance up to 1% or more per year over the buy-and-hold “ladder” approach where a selection of short, intermediate and long-term securities are purchased and left alone to maturity. As long-term bonds “roll down” the yield curve the price tends to get bid up as the bond becomes a premium bond with lower risks. We often sell a bond before it matures, aiming to capture the extra return and then reinvest in higher yielding securities.
Selling Volatility
We can provide additional return through spread capture on callable bonds. Investing in callable bonds is all about selling optionality and expressing a view that implied volatility will fall. We first determine the optimal proportion of callable securities in your portfolio. Then we look at what lookout date (nearest call date) and final maturity make sense in the context of your policy constraints and return objective.
Credit Quality
Flexibility in the use of lower grade securities, such as swapping from AAA to AA can provide additional opportunity for increased returns. Our objective is to provide you with a mix of securities that offer high current income consistency and opportunistic growth potential. Utilizing the appropriate portfolio structure for your investments over long periods of time adds value beyond basic interest rate forecasts.
Municipal Strategy
Most bond managers are content to roll maturities in a laddered bond portfolio. This passive approach is particularly utilized in short/intermediate- term bond portfolios. In contrast, we actively evaluate opportunities to generate extra profits out of each individual security. This process involves an analysis of the slope of the yield curve, the inefficiencies across the yield curve, interest rate expectations, and individual security factors such as call provisions and geographic or sector supply/demand variables.
Advance Refunding
Advance-refunding is a technique where a bond issuer replaces one bond issue with another. This typically occurs when a municipality can borrow at a more favorable rate –for example, when the general level of interest rates has come down or when a particular issuer’s credit rating has explicitly improved or the market feels that it has improved. The new bond issue’s proceeds are typically invested in US government bonds that implicitly guarantee the original issue. Once the call date of the original security is reached the government bonds are sold and the proceeds are used to redeem the original bond issue.