- “We do not rely on rating agencies to determine the credit worthiness of corporate and municipal bond issuers. Instead, we perform our own in-house research, analyzing maturity structures and financial statements with an emphasis on liquidity, cash flows, and debt levels.”
Based on client goals and objectives, the firm allocates an approximate dollar amount or percentage of the portfolio to government, corporate, and/or municipal bonds. We diversify by issuers, maturities, and call features. Our approach, which is designed to minimize credit and interest-rate risk, emphasizes short- to intermediate-term maturities. While our intention is to buy and hold, we seek opportunities to boost returns by selling bonds prior to their due date and reinvesting the proceeds in higher-yielding securities.
Our goal is to add value by capitalizing on the slope of the yield curve and changing spread relationships between different types of bonds and credits. We favor Treasuries and agencies when yield spreads are narrow and prefer corporate and municipal bonds when yield spreads are wide.
Corporate bonds are debt obligations, or IOUs, issued by corporations. These instruments offer higher yields than government bonds or CDs with comparable maturities. Our research is focused on identifying securities with favorable risk/return characteristics, including improving or undervalued credits that may not be recognized by the market.
Municipal bonds are an attractive alternative for investors in high tax brackets. The interest income on most municipals is excluded from federal taxes and exempt from state taxes if the owner of the bond is a resident of the state that issued the security. As a result, munis may offer greater after-tax returns than comparable taxable bonds. We focus on general obligations of state and local governments, as well as issues backed by the revenues of essential services such as water, electric, and sewer.
Treasury Inflation-Protected Securities (TIPS), which are designed to offer investors a real rate of return, may be appropriate as an inflation hedge during periods when the Consumer Price Index is rising. Backed by the full faith and credit of the U.S. government, the yields on TIPS are slightly lower than comparable-maturity Treasury securities. At maturity, holders receive face value or the inflation-adjusted principal, whichever is higher. Due to the tax treatment on income that is earned but not paid, we believe TIPS are generally most suitable for tax-deferred portfolios (such as IRAs).
