|
The Rising
Visibility of Fixed Income Management
Not too long ago bonds were the forgotten asset class.
Equities and other alternative asset classes were
viewed as the investment space of choice and bonds were
the boring, passive asset class.
The idea carried through that bonds were designed
to preserve capital with a simple laddering of
maturities being the optimal strategy.
Nearly two years into this turbulent cycle, the ten year
annualized return for the S&P 500 Index is a negative
3.0 percent.
During the same period, the Barclays Capital US
Aggregate Bond Index has delivered a positive 5.69%
return.
Given this divergence of returns, the investment
community is now beginning to focus on the importance of
bonds in the asset allocation process, especially for
retirement-focused 401(k) participants.
While bond funds have demonstrated a relatively wide
dispersion of performance returns between different
styles of management, funds with similar mandates have
varied considerably as well.
Generally, this is a result of some bond managers
using higher risk investment strategies within the fund,
leading to substantial losses in some cases.
At times, the magnitude of these losses has
mirrored the outcomes in the more volatile equity
markets.
Given this environment, it becomes imperative that
investors and 401(k) plan sponsors thoroughly understand
their bond fund offerings and the analysis of the
investment style and strategies incorporated within
these funds.
At Frost Investment Advisors, LLC there are four key
elements we believe are critical for investors and plan
sponsors to analyze when considering the investment
merits of a bond fund.
#1: All bond funds are not created equal and even funds
with similar investment styles may have dramatic
differences.
It is imperative to know the core underlying investment
style that a manager is using to manage their funds.
During the past year as the financial market stresses
have escalated, several bond funds have experienced
significant valuation declines.
One of the common
complaints by those invested in some of these funds is
that the investor did not understand the risk associated
with some of the core strategies the manager was using
in these bond funds.
Bond fund managers can and do use a significant variety
of investment strategies to achieve their results.
It is a common mistake for investors to compare
funds which have similar names, and may be characterized
by financial publications or consultants as similar, and
assume that each will share similar features.
One particular area of focus is the use of a specific
benchmark - such as the US Aggregate Bond Index.
Some fund
managers may use large amounts of leverage as part of
their strategy while also incorporating securities not
within the benchmark.
There are instances where managers actively take
short positions within their bond or characterize
themselves as a single currency manager while investing
in securities not denominated in the stated core
currency.
Although any of these strategies may be appropriate,
investors and plan sponsors need to understand these
strategies and understand the risks and style bias
associated with these strategies.
#2: Look for active managers that utilize traditional
and easily understood strategies.
In the past decade bond managers have worked to create
excess returns, while often times incorporating
extremely sophisticated “blackbox” portfolio strategies.
These strategies at times offer little
transparency, and, if deployed, can be very difficult
for investors and plan sponsors to understand.
As these managed products have a relatively short
history, we believe there is still little evidence these
exotic and overly complicated strategies result in
consistent risk adjusted excess performance.
We recommend investors and plan sponsors focus on bond
funds that use active management strategies focused on
traditional, straightforward fixed income portfolio
strategies.
Investors should focus on funds and fund managers that
don’t rely on leverage and very short-term trading
strategies while also relying on managers that
incorporate strategic views on interest rate directions,
and credit exposure.
We also recommend focusing on managers that use
individual securities while emphasizing both income
generation and capital gain creation.
#3: Look for transparency.
The public disclosure for many bond funds can be found
wanting of any real details, and are often lacking even
a minimum level of information.
It is critical to understand a bond manager's
portfolio process and investors should focus on funds
where the managers communicate their strategies clearly
and offer higher levels of transparency.
Consider the accessibility a manager offers to
his clients as well.
#4: Analyze the details of the investment advisor.
History can be your guide in picking a high quality bond
fund manager.
Thoroughly review the history of the investment
manager with an eye to their experience. Keep in mind
that consistency in returns and style are very important
characteristics. Just as important is ensuring the firm
is in a solid financial condition.
This will allow the firm to continue attracting
and retaining talent, and focus more on the production
of consistent returns over a longer horizon.
To learn more about Frost Investment Advisors, please
visit
www.FrostBank.com or click
here.
For Financial Professional Use Only – Not for Public
Distribution
Opinions offered constitute our
judgment and are subject to change without notice, as
are statements of financial market trends, which are
based on current market conditions. We believe the
information provided here is reliable, but do not
warrant its accuracy or completeness. This material is
not intended as an offer or solicitation for the
purchase or sale of any financial instrument. The views
and strategies described may not be suitable for all
investors. This material has been prepared for
informational purposes only, and is not intended to
provide, and should not be relied on for, accounting,
legal or tax advice.
Frost Investment Advisors, LLC,
(the “Advisor”) a Delaware limited
liability corporation formed in 2007, serves as the
investment adviser to the Frost Funds.
Frost Funds are distributed by SEI Investments
Distribution Co, which is not affiliated with the
Advisor.
|
