Flexible Allocations
Flexible Income Portfolio Responds to Bond Market Changes
Flexible Income aligns with current bond market trends by incrementally shifting our
portfolios to the most recent, best performing
areas of fixed income.
The five years ending July 31, 2010 saw
many changes to the bond markets, and the
Monthly Flexible Income Portfolio (MFIP)
responded effectively.
Out of the Gate
The initial MFIP was widely diversified and
positioned near maximum possible exposure
to some of the more aggressive components
the portfolio can potentially hold.
With 30% in high yield funds, 20% in strategic
funds (bond funds that can “go anywhere”),
and 26% in low volatility Class 4 funds, the
MFIP took advantage of favorable conditions
for lower-grade corporate bonds at that time.
The MFIP stayed fairly steadily invested in
high yields, global and even emerging market
bond funds for its first two years, and because
of this, it outperformed the Barclays Aggregate
Bond Index handily, 12% vs. 7.5%.
Defensive Moves
2007 and 2008 brought greater volatility to
the bond arena and by late 2007 the MFIP
had abandoned high yields and shortened its
average maturity, resulting in a more cautious
portfolio.
When the credit crisis hit in September 2008,
bonds fell off a cliff but the MFIP had already
become quite conservative, with over 42% in
short term bond funds.
By the end of 2008, the MFIP was very defensive,
holding primarily in short and intermediate
term government bond funds and ETFs.
Rebound
As bonds recovered in 2009, the MFIP gradually
moved out of government bonds and into
a more diversified stance once again.
Had the MFIP held on to government bonds
throughout 2009, it would likely have ended
the year with losses. Instead, by shifting the
portfolio out of Treasuries, the MFIP gained
11.9% in 2009, almost double the 5.9% return
of the Barclays Aggregate Bond Index.
By July 2010, maturities continued to be
skewed toward the shorter end of the yield
curve. High yields comprise 20% of the overall
mix, and global bonds make up over 10% of
the total.
Looking Ahead
Fixed income investors often spend much time
focusing on past performance and forecasting
future market leadership. But the MFIP shows
that it’s more effective to focus on what’s currently
happening in the market rather than
investing based on what you think may happen
in the future. Market changes are often
different than anticipated.
We don’t know where the bond market will
take us a year from now or two years from
now. We do know how important it is to stay
flexible and disciplined in our ability to shift
our portfolios as market conditions dictate.