The Taxable Fixed Income Portfolio is designed to produce optimal
results in all market environments. The approach incorporates the use of
fundamental analysis and quantitative techniques to control risk and produce
excellent relative performance. Portfolios are actively managed, focus on investment grade securities,
and employing rigorous sell disciplines to
preserve market value.
In most environments portfolios are fully invested. It is our
belief that attempts to rely solely on forecasting interest rates result in
unacceptable risk and may produce only marginal benefits. The highlights of the
taxable investment approach are as follows:
Fundamental Analyses of Economic Conditions and Fixed Income Investment Opportunities
Selection of Investment Grade Taxable Bonds
The fixed income investment process begins with a detailed understanding
of the client's investment goals and objectives given tax considerations. This
leads to the selection of an appropriate fixed income universe that addresses
the client's risk profile. This provides a framework for the structure and
management of portfolios using taxable securities.
Computer modeling assists in simulating the potential performance of the
investments selected from the relevant universe. Ongoing review techniques, such
as duration management, sector analysis and the monitoring of maturity
structure, risk premiums and option-adjusted spreads are the basis for the
process ensuring that only the fixed income securities which best meet the
client's objectives are selected and retained.
Client Investment Objectives - Investment guidelines are established
which determine an investment plan designed to meet the client's objectives
within the defined risk parameters. This provides the basis for choosing the
universe of securities best suited to maximizing return expectations.
Acceptable Quality Standards
Universe Analysis - A fundamental and analytical approach
allows us to completely evaluate the appropriate universe of securities based on
the risk profile. This provides the basis for structuring the optimal portfolio.
Sector Selection - RNC Genter compares alternative fixed income sectors
to U.S. Treasuries by performing a break-even analysis to identify superior
investment candidates, while addressing tax implications when appropriate.
Maturity Distribution - We begin the investment selection process by
separating all U.S. Treasury Securities into definable maturity categories (1-3
years, 3-5 years, etc.) for quantitative comparison. A cash flow analysis and a
yield curve study are performed on all treasury securities prior to
investigating alternative investments.
Quality Structure - A quality profile of the portfolio is established by
determining the overall mix within the universe. The analysis includes the
Extensive appraisal of present and future economic conditions
Comparative review of past and present yield premium requirements to various risk components
Rating service assessment, Moody's Bond Rating used for illustration
Duration Management - We do not rely excessively on interest rate
forecasting, but target the overall portfolio duration to be within a narrow
range of the identified benchmark. We evaluate and manage the impact to
the portfolio's change in price, yield and maturity to definable changes in
interest rates. We limit our deviation from the duration target to avoid
unpredictable price sensitivity. In addition, we define the risk/reward
characteristics of each issue for optimal results. We then use quantitative
methods to evaluate the effective duration on individual securities.
Quantitative Modeling - Prior to structuring the portfolio, or making
changes in the portfolio, we perform:
Rate of return analyses under various interest rate changes and time horizons
Return expectations compared to the universe of securities
Probability studies to validate confidence levels and confirm performance advantage
Active Management - Our goal is to add value to each portfolio
through continuous management. We actively monitor all holdings using
fundamental and technical analyses and take advantage of opportunities to
substitute these securities for other candidates based on changing relative
attractiveness. Our quantitative and qualitative approach emphasizes safety,
quality, and a continued focus on meeting client objectives.
Sell Decision Process
The fixed income sell discipline is virtually embedded in our purchase
process in order to avoid surprises. We have found that waiting for downgrades
to be disseminated through the rating services is only a reactive process and
virtually guarantees the loss of value. We believe that any fixed income
security not adequately discounted for possible negative ramifications can cause
disappointment. Therefore, before structuring a portfolio, we look at every
purchase candidate by means of a vigorous critical analysis for a worst case
scenario. However, we monitor the rating services and anytime an issuer of a
position we hold is placed on credit watch with negative implications, a thorough
re-evaluation of credit will occur.