Our investment philosophy for managing a fixed-income portfolio is a balance of managing risk while seeking opportunities in the market place. We feel strongly that each public entity we work with should have a written investment strategy which apart from their investment policy. The strategy differs from the investment policy because it is how we play the game whereas the policy refers to the rules of the game; in other words, the policy stays the same when market interest rates are high or low, but the strategy says how the portfolio should be rebalanced to protect against the inherent risks of market fluctuation.
Every public entity has three dominant mandates for their funds–liquidity, safety and yield. First we define liquidity needs through a cash flow analysis. Second we look at the issue of safety in regards to risk management. The investment policy defines the limitations of the investment vehicles we have to choose from. Usually we find about a dozen areas of risk that need to be addressed in a public funds portfolio ranging from market interest rate changes to corporate bond ratings changes. Last we consider yield. When considering better yield, we consider the yield today as well as the potential yield of tomorrow. Managing and maintaining a high yield in the fixed income portfolio takes a balance of diversification in both maturities and investment vehicles.
Central to our investment philosophy is risk management, because in every investment there is risk. We identify the risk, hedge the risk, and counter balance the risk; then we educate our clients on the risk in the portfolio and specify how we will manage those risks. We use macroeconomic, technical and yield curve analyses to get a bearing on market interest rates and adjust the investment maturities. Additionally, we keep a watchful eye on the yield differentials between classes of bonds (e.g., high-grade corporate and government) in an attempt to take advantage of an anticipated widening of spreads. In a higher interest rate market we recommend increasing duration and a “barbell” (half short term and half long term) for flexibility and potential for capital gains in investments. |
