HOW SHOULD I EXPECT THIS STRATEGY TO PERFORM IF INTEREST RATES RISE TOMORROW?
Our Stability strategy focuses on maximizing yield while limiting downside risk in adverse interest rate environments. To achieve this objective, we manage the strategy aiming to achieve the following interest-rate sensitivity mandates:
- Positive annual total returns if interest rates rise by +100 basis points
- Only minimal losses in a given year if interest rates rise by +200 basis points.
HOW DO YOU ENSURE THIS STRATEGY'S LOW VOLATILITY MANDATE IS MET?
On a daily basis, we determine the ideal mix of municipal bond structures that would maximize Stability portfolio yield while ensuring that our mandate — positive annual total returns if interest rates rise by +100 basis points and only minimal losses if interest rates rise by +200 basis points — is being met. Having then modeled the ideal low volatility portfolio for that day, the investable universe for Stability portfolios is limited to the ideal mix of municipal bond structures identified each day, with portfolio managers targeting purchases within a specified yield range for each municipal bond structure.
HOW DO YOU SPECIFY THE TARGET YIELD RANGE FOR BONDS PURCHASED IN THIS STRATEGY?
In determining the target yield range for municipal bond structures purchased for Stability portfolios, we take into account the major components of each bond’s total return — namely, yield (i.e., income return) and the inverse relationship between interest rates and the bond value (i.e., price return). Having set a limit for allowable downside risk, we identify the lower and higher bounds of the target yield range by determining the lowest and highest possible yields that would still enable Stability portfolios to generate positive total annual returns if interest rates rise by +100 basis points and to minimize losses if interest rates rise by +200 basis points.
WHAT IS THE CREDIT QUALITY OF OBLIGOR-SECURITIES HELD IN STABILITY PORTFOLIOS?
Because our aim is to provide steady returns and minimize volatility in this strategy, our credit research team takes great care to select only municipal bonds backed by well-known obligors with very high credit quality, so investors do not take on any undue credit risk. As part of their fundamental credit research process for bonds held in this strategy as well as in our other strategies, our credit research team analyzes the material risks that may indicate a borrower’s ability and willingness to repay a bond, including environmental, social, and governance (ESG) factors.
WHY DOES THE AVERAGE DURATION FOR THIS STRATEGY FLUCTUATE?
In order to minimize portfolio volatility and meet the aforementioned dual mandate in different interest rate environments, average duration for this strategy will fluctuate. In looking to minimize downside risk, we may invest in shorter-duration bonds at times when income return (yield) is too low to offset potential negative price return; at these times, Stability portfolios may have a lower average portfolio duration.
To see how our Stability portfolios are currently structured relative to our other strategies, including our laddered municipal bond portfolios, please compare our strategies.
HOW DO YOU MEASURE RELATIVE PERFORMANCE OF A STRATEGY WITH VARIABLE DURATION?
Whereas benchmark indices typically maintain a constant duration, the overall duration profile of the Stability strategy will vary depending on the interest rate environment. As a result of the Stability strategy’s flexible duration, we measure this strategy’s performance relative to both a short-term benchmark index (i.e., Merrill Lynch 1-2 Year U.S. Municipal Securities Index) and an intermediate-term benchmark index (i.e., Barclays 1-10 Year Muni Bond Index Blend (1-12)), which provide a range for comparison.
SHOULD I VIEW THIS STRATEGY AS A SOURCE OF QUICK LIQUIDITY?
While a consistently short-term municipal strategy might be viewed as a source of quick liquidity, this more dynamic strategy provides a fair degree of liquidity. Although this strategy is intended for “buy and hold” investors who own municipal bonds as long-term investments rather than for liquidity management, we recognize that you may at times wish or need to sell your municipal bonds prior to their stated maturity date. To ensure that your cash is accessible when you need it and at a price that prevents or minimizes loss, we focus on individual bond and overall portfolio structure, credit quality, and market perception of bond value.
If you are looking for a strategy that provides even greater liquidity, please see our liquidity management solutions.
IN THE MANAGEMENT OF THIS STRATEGY, DO YOU MAKE INTEREST RATE CURVE BETS?
We do not make interest rate bets on which way interest rates will move for any of our strategies. Although the Stability strategy seeks to maximize yield while maintaining adherence to our mandate of limiting downside risk in all interest rate environments, it does not make any assumptions as to the future direction of interest rates. Rather, the quantitatively-driven dual interest rate mandate that governs the Stability strategy’s management is a constrained optimization equation aiming to maintain the strategy’s objective, regardless of changes in the municipal yield curve over time.
CAN STABILITY PORTFOLIOS BE CUSTOMIZED BY STATE?
Investors in California can optimize tax efficiency through our California state-specific Stability portfolio. In consideration of clients’ best interests, we only purchase bonds with high-quality credit profiles that adhere to our strategy objectives. For this reason, other state-specific options are not available given that we do not see sufficient availability of attractive bonds that fit our investment criteria for this strategy while supporting portfolio diversification.
To learn more about how we can customize portfolios to meet investors' specific investment objectives, please contact our Advisory Services team by calling (858) 436-2200 or by emailing