by: Frank Mullen
Mike Tyson is famous for saying that “everybody has a plan until they get punched in the mouth.” It’s debatable whether Iron Mike was truly the “Baddest Man on the Planet” during his prime, but you can’t dispute that the bond market this year has taken one on the proverbial chin.
Investors have had a simple yet effective plan in place for the last several decades – hedge your stock portfolio with an allocation to fixed income. The asset class provided a steady return and had the added benefit of rising in price when stocks declined. It was a great scenario for investors and gave rise to the common 60% equity/40% fixed income portfolio that’s commonplace today. 2022 has been a one-two punch that’s challenged this plan and many are scared that central banks have the conviction to deliver the knockout blow.
We have been warning clients for years about the extreme level of complacency in fixed income markets. It was the forgotten part of people’s portfolios that many hoped they could just set and forget. We flagged that lower yields had forced people to reach and that there were more risks in the system than many were willing to acknowledge. The structure of most portfolios and the incentives of their respective managers made these risks easy to ignore and bask in the comfort of hiding in the middle of the investment herd.
Our fixed income portfolios are unique. They don’t look like an index or any other portfolios in their categories. We have a time-tested investment approach that guides our portfolio construction and focuses on only taking risks when we think we both have an edge and we’re getting paid appropriately. That’s an easy thing to say and most would believe that all managers take that approach, but it simply isn’t true. Behavioral biases and fund structures get in the way of many portfolio managers leading to sub-optimal returns.
Download the rest of Frank’s commentary: >> Q3 2022 Fixed Income Commentary
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