CTWM Investment Committee: Bond AllocationSubmitted by Connecticut Wealth Management, LLC on March 17th, 2016
Last week our Investment Committee approved a slight change to the bond allocation within our target portfolios. Specifically, we are reducing exposure to floating rate fixed income and are investing the proceeds into corporate high yield bonds. The rationale behind this change is to position the bond allocation to reflect where we see the most opportunity to maximize gains and take advantage of compelling risk/return tradeoffs. Please note further specifics below:
- As a whole, floating rate and high yield comprise the “economically sensitive” portion of the bond allocation. The purpose of having these asset classes is to decrease your portfolio’s sensitivity to interest rates and protect you as interest rates begin to creep up.
- The interest rate protection that floating rate provides will become more meaningful after we see the Federal Reserve raise rates a few more times. Due to recent economic volatility, the anticipated timeframe for these increases has been somewhat extended. We expect to redeploy assets into floating rate closer to the end of that timeframe.
- High yield bonds have received a significant amount of negative press recently, mostly due to a perceived elevated level of defaults within the energy portion of the asset class. As a result, we believe that the entire asset class has been unnecessarily punished and is therefore priced attractively.
- Mainstay High Yield, the manager we recommend within high yield, is defensive by nature and has been underweighting to energy for a significant period of time. That has led to significant index-relative outperformance as of late.
- The yields within the high yield asset class (7% or higher) have increased to the point that they will provide a buffer should the asset class see continued price volatility.
Please feel free to contact us with any questions.