Fixed Income Process by fiy12394

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									Fixed Income Options in
   Today’s Economy
   by John Milne, CEO
JKMilne Asset Management
   What Are The Fixed Income Options?
                    More than ever:

• Process: Active or Passive
• Style: Sector Rotator or Duration Manager
• Decision Basis: Macro Economy drives Top-Down
  decisions? Or are decisions driven from the Bottom-
  Up by Micro Economic factors such as credit
  selection, issue structure and/or, optionality?
• There are increasingly more clearly defined style
  differences in Fixed Income that became evident in
  2008.
  What Are The Fixed Income Options?
       More than ever: continued

• There are more “sub asset” classes such
  as Investment Grade, High Yield, Non-US,
  Distressed…and more.
• Who do you want managing your money?
  Big Box, Boutique, Mutual Fund, ETF?
• Is the money managers ownership
  structure important? Independent?
• Critical Decisions…the “vehicle” used to
  acquire the above characteristics.
  Why Are The Vehicles
      Important?



Manager risk has become as great as
          investment risk.
The Fixed Income Opportunity
        Decision Tree
    There Are Long and Significant
 Secular Opportunities in Fixed Income
Investment Period        Investor Risk                         Hallmark (What Happened?)
                          Benchmark
   1946-1958                    None                 “Low Interest Rates” largely a corporate bond
                                                              market, no long bond exists
      1960                      None                 “Nothing” 1960 the Tsy 10yr was 4.67%; 1969
                                                                        7.15%
      1970                      None                  “Asleep at the Wheel” 1970 10yr Tsy Yields
                                                           7.4%; 1979, 9.34%; 1980, 12.67%
      1980                   Lehman                   “The Mortgage Market Layup” As investors
                            Aggregate                  became risk managers they buy the market
                                                             components in the indexes
      1990                Aggregate +                  “The Anything but Government Bonds
                                                    Homerun” As the mantra is “buy corporates and
                                                      Drexel will make me alpha.” Drexel closes
                                                                  Valentines Day 1989
   2000-2010                 Barclays                  No leadership. Corporates hit all time wide
                            Aggregate                  spread October 2002, 2008 mortgages are
                                                                       volatile

               Source of yield data “Analytical Record of Yields & Yield Spreads” Saloman Brothers
             What is a common active
              bond market index?
  •Primarily U.S. investment-grade markets
  •Liquid and does not include cash
                           Barclays Capital Aggregate Index




Source: Barclays Capital
As of July 31, 2010
              Barclays Aggregate Index
                  Quality Exposure




Source: Barclays Capital
As of July 31, 2010
             Barclays Corporate Bond
                Quality Exposure




Source: Barclays Capital
As of July 31, 2010
    It’s Not Your Grandfathers
            Bond Market
• Corporates are increasingly correlated to
  the equity market
• The Total AAA Corporate Issuers are:
   – ADP
   – Microsoft
   – Johnson & Johnson
• The result is a market heavily reliant on
  credit decisions
   Historical Interest Rates 10yr Tsy Note




Source: Bloomberg
                       Treasury Yield Curve




Source: Barclays Capital
As of August 31, 2010
Yield Spread between the 2yr and 10yr Tsy
                 Notes




Source: Bloomberg
                           Market Returns
                             Total Return 1 Yr    Total Return 10 Yrs
                                8/31/2010        8/31/10 (annualized)
             Aggregate             9.18                 6.47
     Intermediate Agg              8.25                 6.21
          Intermediate
                                   8.18                 6.09
           Gov/Credit
  Intermediate Credit             11.35                 6.70
            Securitized           6.97                  6.41
             High Yield           21.52                 7.54
        S&P 500 Total
                                   4.91                 -0.01
          Return
Source: Barclays Capital
As of August 31, 2010
    US Aggregate Year to Date
        Excess Returns




Source: Barclays Capital
As of August 31, 2010
       What’s New?
Liability Driven Investment (LDI)
Government Debt as a % of GDP
Selected Countries: Public Debt-to-GDP Ratio
                (In percent)




Sources: United Kingdom: Goodhart (1999) and IMF, World Economic Outlook database. United States: Historical Statistics of
  the United States, Millennial Edition Online; Office of Management and Budget; and U.S. Census Bureau. Japan: Bank of
   Japan, Hundred-Year Statistics of the Japanese Economy; and Toyo Keizai Shinposa, Estimates of Long-Term Economic
                        Statistics of Japan Since 1868. Data for Japan refer to the central government.
    The Reality of Fixed Income
      Options “Let’s get real”
• Interest rates are near or at record lows
  depending on if we look at short term or
  long term rates.
• US GDP has been losing “velocity” for 50
  years now.
• The US is in a second jobless recovery.
• 245 million Americans over the age of 16
  with 80 million not working (for any reason).
Source: US DOL, JKMAM
 What Are the Market Options?
• Hey, rates stayed this low for 12 years
  between 1946 and 1958. It does happen.
• Whoa, rates can go lower with low
  inflation or continued dis-inflation.
• No one in this room lived with deflation
  and its consequences so we take the
  scenario off the table for investment
  purposes.
         Snapple Cap Fact
• Interest rates can go negative, you pay
  someone to borrow your money.

  MARCH 26, 2009 US Treasury 1Month
                 TBill
                -.005%
     Fixed Income Options in
        Today’s Economy
• Investors have more options to
  DIVERSIFY style, process, and culture of
  their fixed income MANAGERS.
• A very unique period that does not have
  any leadership creates the opportunity to
  insert OPPORTUNISTIC strategies. That
  is, hire a manager on the pretense that
  they will be terminated upon success.
            TAKE AWAY
• There is a need to find the optimal
  combination of NIMBLENESS and HIGH
  CONVICTION in the same investment
  process.
• That is to say, the “off the chart” low
  yields and high volatility need to be
  managed well or you will risk significant
  losses in bonds and fracture the
  manager.

								
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