When I review different investors portfolios, I’m quite often surprised at the exposure to bond mutual funds. This has a lot to do with the cookie-cutter asset allocation philosophy that is pervasive throughout the financial advisor community, where recent historical returns are used as a proxy in building a portfolio allocation. Of course the last 30 years have seen mostly low and declining interest rates, which are a major positive for bonds and bond funds, but with rates artificially low and nowhere to go but higher, the future is likely to look much different than the past. Bond funds in general have very little chance of providing solid investment returns over the next decade and depending on the severity of the increase in interest rates, these funds could lead to substantial losses. Market participants must be aware that when interest rates rise, the price of existing bonds go down in value. That doesn’t mean that market participants should pile into stocks at any price, but this is why the value investing discipline is so essential.
At TTCM, we hand-select each and every security, whether it be an equity or a fixed income security such as a bond. This allows us to position our clients’ only in the securities that are trading at a discount to intrinsic value, as opposed to exposing them to virtually the whole market, like many mutual funds do. In addition, we utilize strategies such as covered calls and cash secured puts, which can generate income without exposing our clients’ to the same interest rate risks that exist in the fixed income market. We also adjust our asset allocations based on maximizing risk-adjusted returns, starting with a bottom-up approach. We are comfortable investing in any asset class, at any time, as long as our extensive research tells us that we are positioning our clients’ to maximize returns and avoid permanent losses of capital. This flexibility is essential and I believe will make a substantial difference over the next decade.