Power of Flexibility
Flexible Income Navigated the 2008 Credit Crisis
The last two years offer an example of how
dynamic fixed income leadership can be. In
2008, the worldwide credit crisis was wreaking
havoc with the typically staid realm of fixed
income. Investors shunned corporate bonds of
every stripe and a “flight to quality” meant only
US Treasury bonds held value. High yield bond
funds were devastated, as some funds lost 30% or
more of their value in a matter of weeks. Floating
rate funds suffered likewise.
During this time, our Flexible Income approach
led us to an increasingly conservative portfolio.
In turbulent markets, the Monthly Flexible
Income Portfolio (MFIP) defaults to safety –
short term bond funds. In 2008, the MFIP gradually
increased its allocations to short term bonds,
from 27% in January 2008 to 61% by January
2009.
An example of the effectiveness of the Flexible
Income strategy can be seen through one fund,
Loomis Sayles Bond (LSBRX), shown on the
chart below. This go-anywhere fund comprised
20% of the MFIP in early 2008. We had held it
for about two years and had earned over 12%
from this holding during that time.
But in June of 2008, the fund shed 2% of its value,
prompting us to sell half the position in early
July; continued weakness in July prompted us to
sell the remaining shares in August. Investors
who continued to hold the highly regarded fund
didn’t fare well. Loomis Sayles lost another 24%
of its value over the next four months from
August through December 2008.
Investors who followed the Monthly Flexible
Income Portfolio, however, used the proceeds
of the August sale of LSBRX to purchase
SHY, a short-term (1 to 3 year) Treasury ETF.
From its purchase in August 2008 until June 2009
when it was sold, SHY earned 3.7%. And we sold
SHY to buy back a familiar name: Loomis Sayles
Bond. LSBRX had lost 9% from the time we sold
it in the MFIP to the time we bought it back.
Since it was re-purchased, it has gained over 29%.
Of course, this was an extreme period and not
every series of trades in the MFIP will be as successful
as those recounted here. But it is worth
recognizing that, even in times of dramatic shifts
in the bond markets, we have the flexibility to
move among widely differing funds and ETFs
– reducing risk with ultra short-term funds, or
reaching for opportunities in the high-yield or
foreign bond space.
