Build a Better Bond James C. McClendon, Chief Investment Officer & Managing Director
Interest Rates
Fixed Income Sector Returns Source: J. P. Morgan Asset Management
Treasuries Mortgage Related Corporates Agencies Asset Backed The Bond Market Has Many Different Components Total Bond Market Interest Rate SensitiveEconomically Sensitive
Fixed Income market has changed Source: Guggenheim Partners, SIFMA, Credit Suisse, Barclays. Data as of June 30, 2013
Global Bond Market Bond market has evolved, so has volatility
Global Opportunities = Higher Vol STANDARD DEVIATION Index1 Year3 Year5 Year Barclays US Aggregate Bond Index Barclays Global Aggregate Bond Index JPMorgan Emerging Markets Bond Index
Price Impact of 1% Change in Interest Rates Large impact on returns across sectors with 1% increase in rates. No where to run No where to hide
Price Impact of 1% Change in Interest Rates Floating Rate Fixed income Portfolio would be down -0.1% 30yr UST Portfolio would be down -17.4% Portfolio returns could range from -0.1% to -17.4%
Taper Tantrum 4 month return = -4.5%
Taper Tantrum % Drawdown
Rolling Returns One Year Rolling Returns J F M A M J J A S O N D J F M A
Rolling Returns Three Year Rolling Returns JFMAMJJASONDJFMAJJASONDJFMAMJJASONDJFMAMJJASONDJFMAMJJASOND
Barclays Intermediate Government/Credit Rolling Returns 1 – 15 years
Expectations of Return For Returns: BONDS* Average Return Range of Returns 1 Yr to Yrs 2.90 to Yrs 3.99 to Yrs 4.39 to Yrs 4.23 to Yrs 4.13 to Yr Yrs Yrs Yrs Yrs Yrs 6.92 *BARCLAYS INTERMEDIATE GOVT/CREDIT Interm Index (1/1/1984 through 12/31/2013)
Interest Rates
Rates and bond prices move in opposite directions
A Better Bond Portfolio
Traditional Balanced Portfolio Combining stocks and bonds in a Balanced Portfolio offers investors diversification and an opportunity to achieve improved risk- adjusted performance
Bridging the performance gap between stocks and bonds (10yrs)
S&P 500 TR Traditional Balanced Portfolio Barclays Agg Bond
Drawdown (10 yrs) 21
Taper Tantrum 4 month return = -4.5% How did Traditional Balanced Portfolio performed during 4/2013 through 11/2013?
Taper Tantrum 23 Barclays drop = -4.5% Traditional Balanced drop = -1.3%
Traditional Balanced Portfolio The 60/40 Traditional Balanced portfolio provides an opportunity for improved risk-adjusted performance, capturing 90% of the return delivered by equities with only 65% of the volatility
Risk/Reward profile
Traditional Balanced Portfolio Higher return than Bond Portfolio Lower volatility than Equity Portfolio Steady, consistent, predictable returns
A Better Balanced Portfolio TPFG Better Balanced Portfolio
29 TPFG Balanced 30% Fixed, 70% Equity Traditional Balanced TPFG Balanced 50% Fixed, 50% Equity TPFG Balanced 70% Fixed, 30% Equity Barclays US Agg Bond S&P 500
Taper Tantrum 4 month return = -4.5% How about TPFG Better Balanced Portfolio performance during this time?
Taper Tantrum Barclays Agg with 0% loss Barclays Agg.
Taper Tantrum 32 Traditional Balanced drop = -1.3% Barclays drop = -4.5% TPFG Better Balanced Portfolios never dropped below zero
Deliver predictable results with reasonable risk TPFG’s ROLE
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Risk Management
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