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Actively managed bond portfolios have shown the ability to reward investors with higher yields, greater returns and lower risk than passive approaches, such as non-managed laddered maturity portfolios.

Investors overreact to events. The euphoria or pessimism that impacts the price of stocks has a similar impact on the price of a company’s bonds. This causes them to be either overvalued or undervalued in relation to the company’s long term prospects. We take advantage of these similarities by using a value oriented approach in managing bond portfolios. We purchase undervalued bonds and sell fully valued and overvalued bonds.

Security Selection

Yields and cash flows are higher when bonds are purchased at lower prices. Our value orientation leads us to seek out securities that are cheap relative to the market. This favorable pricing is created by investors who have overreacted to events at a particular company or which impact all companies in an entire industry.

Capital appreciation arises when a company’s results exceed investor expectations. Positive credit momentum is the catalyst. This is a second criteria that investments must meet. We seek out those companies that appear poised to improve their earnings. Companies are dynamic and constantly changing resulting from the internal influences that the management team imposes and external forces such as industry competition, technological innovations, political or legislative actions (or inaction!) and foreign competition.

Always Watch Out for the Downside

We adhere to an old Wall Street saying: it is far easier to beat the averages by preserving capital in a down market than by trying to outperform in an up market.

This more conservative approach to security selection results in out-performance in down markets in each of our programs. We feel our investors more highly value the avoidance of bear market pain than a little extra return in up markets – especially since the result has been better long term total return.

Searching for the Best Price:
Cost is a Real Issue

We pride ourselves on our cost effectiveness. Our management fees are very low and we regularly provide comparisons to alternatives, such as mutual funds, to assure a continuing competitive fee structure.

Fees are one consideration, but another real cost is bond prices. The corporate bond market does not trade on an organized exchange where all buyers and sellers are subject to the same prices. The bond market is largely an over the counter market. Each broker-dealer is free to buy and sell at any price it can develop. Therefore prices can vary easily substantially (by several points or more) on an investment grade bond. We have developed a network of over 30 broker-dealers through which we seek competitive bids to locate the best price.

An extra benefit is provided to clients because we purchase many bonds in institutional block sizes or “wholesale lots.” The institutional block size purchasing could save the investor up to 5 points on a trade in many instances over a small retail purchase of 5, 10 or even 100 bonds.

An Intermediate Maturity Provides a Higher Level of Protection from Increases in Interest Rates than Longer Dated Maturities. For the Long-term Investor collecting or compounding at a higher yield usually offered on intermediate maturities far outweighs the slightly better price stability of very short maturities or money market funds. Generally, our portfolios average about a 6.7 year maturity.

Impact on a 6% Coupon Investment Grade Bond
Price from Change in Interest Rates

Maturity	1% Change	2% Change
2 Years	2%	4%
4 Years	3.5%	7%
6 Years	5%	10%
8 Years	6%	12%
10 Years	7%	14%
30 Years	12.5%	22%

Broadening the diversification of a fixed income portfolio to include high-yield bonds historically has reduced interest rate risk. High yield bonds have shown significant non-correlation to Treasuries and other investment grade bonds. So the table above does not apply to high yield bonds. In some cases the value of a high-yield bond increases after interest rate increases. A conservative allocation to high-yield bonds, like that of our Broad Market Program, has had a significant effect on yield, return and stability.