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Mount Vernon Associates takes a similar approach to managing bond portfolios to equities in that the starting point is analysis of the economic cycle. Being in touch with the economic cycle and consideration of geopolitical events and conditions allows for an educated hypothesis regarding the general direction of interest rates, and possibly changing shape of the yield curve. Although interest rate prognostication is not the focal point of our fixed income process, it is nonetheless necessary to determine a targeted maturity or duration for a portfolio, and positioning along the yield curve.
After the targeted portfolio maturity and duration are determined, quantitative research is performed to find relative value among fixed income sectors (governments, corporate bonds and mortgage-backed securities, e.g.). In the corporate bond segment, specific names are targeted after conducting thorough credit analysis with regard to a company's long-term ability to service and manage their indebtedness. The mortgage-backed segment is reviewed for relative value, liquidity, and predictability of cash flows. In structuring the fixed income portfolio, care is taken to diversify among names and sectors. Lastly, specific bonds are selected for their relative valuation, as a fit for our duration and yield curve objectives, and are evaluated for the possible impact of any embedded options (call features, prepayment options, etc.).
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