Perspectives Blog

Rates rise, convertibles do what?

David King, CFA, Senior Portfolio Manager | August 9, 2013

…ods, convertible securities had a negative return only when equities also lost money. Convertible returns were neutral or positive as long as stock returns were positive.* While it is difficult to measure, the option-adjusted duration of the convertible market is low, similar to that of a short-duration bond fund.** Re-allocating bond exposure to convertibles will tend to shift risk away from interest rates and toward equity risk factors like gro…

Gut check: The outlook on fixed income

Colin J. Lundgren, CFA, Head of Fixed Income | February 24, 2014

…l over the next three years. Same question for municipal bonds? Maybe not first, but should win a medal. Municipal bonds suffered with most other high-quality fixed-income sectors in 2013. The asset class tends to have longer durations so rising rates can be challenging. Munis also suffered from negative headlines (such as Detroit, Puerto Rico) and persistent outflows. But the underperformance of the sector appeared excessive to us. Any fixed inc…

The secret to managing pension plan risk

Frank Salem, Senior Portfolio Manager | February 10, 2014

…me under funded by 25% or more depending on the change in interest rates. Changes in the present value of pension liabilities are driven primarily by changes in the interest rate used to discount future payouts. With the long duration of a pension plan’s liabilities, even small changes in interest rates can have a large impact on present value. When plan assets are not aligned with the liability the funded status will be highly volatile. While eq…

The importance of taking a long-term perspective

Jeffrey Knight, CFA, Head of Global Asset Allocation | February 3, 2014

…estment opportunities. Frankly, our expectations for bonds in 2014 are even more meager than our already subdued five-year forecasts. The fact that bonds performed well in January, then, could present an opportunity to reduce duration when the current volatility storm subsides. The other asset category to consider is emerging markets (EM). Here, we make the simple observation that investor flows turned negative during 2013, and provide an ongoing…

Municipals flashing “buy” signal

Chad Farrington, CFA, Head of Municipal Bond Research | July 8, 2013

…around a 7.0% taxable equivalent yield in today’s market environment. For example, an ‘A’ rated bond maturing in 14 years offers around a 3.99% yield, or 7.05% on a taxable-equivalent basis – similar yield but with much less duration than a 30-year ‘AAA” rated bond. It is important to note that adequate credit research capabilities are necessary to take advantage of lower-rated investment grade securities. Although an improving economic environ…

January asset allocation update

Jeffrey Knight, CFA, Head of Global Asset Allocation | February 3, 2014

…ng period for a number of fixed income markets. Although interest rate risk remains strategically unattractive, we note that valuation improved considerably during 2013, and we find rates to be closer to fair value for longer duration bonds. In addition, we find that some fixed-income risks remain attractive. Certain spread sectors offer adequate compensation for credit and liquidity risk. We continue to find high-yield U.S. corporate bonds to be…