Philosophy
We offer our Taxable Bond product through a sub-advisory relationship with an experienced advisor managing in excess of $2 billion firmwide. Our Taxable Bond Strategy offers taxable portfolios to clients who seek an allocation to high quality bonds but do not require tax-exempt income. The taxable municipals must meet the same criteria as the municipals purchased for tax-free portfolios, including primarily investment grade general obligation or essential service revenue bonds. The result is a portfolio with an average rating close to “AAA” that has an average maturity between 5 and 7 years and an average duration between 4 and 4.5 years. The portfolio is benchmarked against the Lehman Brothers Aggregate index.
Investment Process Information
The investment process begins by establishing a set of parameters for the portfolio. An investment strategy is then formulated by analyzing the risk adjusted returns throughout the taxable municipal market. Security risk is evaluated by first considering the interest rate risk. The yield curve is analyzed to determine potential returns based on different maturity structures. The firm then considers call risk by evaluating the embedded call options of a security and identifying circumstances where callable bonds may be mispriced. Credit risk of a security is analyzed to evaluate the trends in credit quality and yield curve relationships. Finally, liquidity risk is considered by evaluating the marketability of the bond.
The goal of the strategy is to exploit situations where returns outweigh the risks. The firm’s relatively small size is an advantage, as we can participate in smaller bond offerings that larger firms avoid. Many smaller bond issues have higher yields, however larger firms cannot buy enough of these smaller issues to increase return so they are generally avoided.
Proprietary credit research is employed, not just reliance on the existence of municipal bond insurance when performing credit analysis. We believe that these insurers have highly concentrated risks, and are subject to default. Portfolio management is extremely conservative, with capital preservation as an important part of every aspect of the process.