• Philosophy

We believe that fixed income securities are best utilized for defensive purposes, that is, to reduce portfolio volatility on a permanent basis or to protect capital during economic downturns.

We believe that income needs should not dominate fixed income investment strategy. Current income is usually best generated by a combination of modest current income and capital gains, a total return approach.

We believe that active management of fixed income portfolios can enhance overall returns. Fundamental analysis of the economy, bond valuation and default risk can help fixed income investors protect principal or capture extra return.

Again, we believe in minimizing trading costs for fixed income as well as for equities. Corporate and municipal bonds, in particular, are very expensive to trade.

Portfolio Construction

Our fixed income portfolios consist of both corporate and government notes and bonds of various maturities.

Consistent with our economic assumptions, we look to purchase fixed income securities which are:

- Unlikely to experience any significant default risk. In practice this means we limit our purchases to investment grade securities.
- Attractively valued based on:
       - The current available real return compared to historical averages and expected changes.
       - The current quality spreads compared to historical averages and expected changes
       - The current expectation for future inflation compared to historical averages and expected changes
       - Under certain conditions we may set our portfolio maturity (actually duration) to be substantially different than the overall market, either to protect the principal or to capture extra return. Under the right conditions we will also use inflation protected securities such as TIPS.

We do not use any derivatives or managed products for the fixed income component of our investments.

Sell Strategy

Fixed income securities are often held until their maturity date, especially corporate securities which are expensive to trade. Reasons for sale include:

- A change in client objectives
- An actual or anticipated deterioration in credit quality.
- A dramatic change in portfolio target duration. Duration changes are most often effected gradually but if sales are necessary, the change can usually made with treasury securities which are inexpensive to trade.