|Bond Management |
Our overriding philosophy in the management of our fixed income portfolios is to provide capital preservation, while providing income, if needed. Our concern about the highly-leveraged economy, and our commitment to preserving principal demand that we limit our fixed income holdings to only the highest quality instruments. All bonds that we purchase are limited to individual U.S. Treasury Bonds and Notes, and AAA and AA corporate and/or municipal bonds. We also limit our maturities to 1-6 years, which limits risk from large interest rate swings. For instance, if interest rates rise, losses are minimized since the bonds will soon mature. Yet despite this risk averse approach,we have generated very competitive results over time (see below). More recently we are generating tax-free yields between 3% and 4% annually. We do this by buying bonds that may be callable. This is a unique niche market. These bonds have higher yields than bonds without this feature. While some may be called, most issues are not called due to various considerations including low financial incentives of the issuer.
Ms. Kirkpatrick and Mr. Lang have been successfully managing bond portfolios for a combined period of sixty five years. Currently about 75% of our assets under management consist of individually managed (as opposed to pooled) bond portfolios. These accounts include individuals, retirement plans, and IRA's. risk is held to a minimum by ensuring that the portfolio is well-diversified. Each individual bond holding only represents 5% to 8% of the total bond portfolio. No subprime, insured or CDO securities are held.
Fixed income accounts are set up in the client's name at a broker or bank of your choice. Therefore, they are not "pooled" with other clients. This eliminates the main (and valid) criticism of bond mutual funds: lack of transparency. With our product, you may access your account online 24/7 with an independent third-party custodian. In addition, you may redeem your account at any time, as opposed to quarterly or annual limitations.
An unusual circumstance is apparent at this time with respect to municipal bonds. Interest rates have generally been higher for taxable bonds (corporate bonds, c.d.'s, etc.) than municipal(tax-free) bonds. Now however, the traditional condition is reversed, which means that tax-exempt bonds yield more than taxable bonds. So, as long as we maintain the highest quality, we are pursuaded that tax exempt bonds are now more attractive, even in account types that traditionally did not buy them (IRA's, pension and profit sharing accounts, etc.).
Here are the following portfolio parameters for this product:
Average Yield-to-maturity 4.14 %
Average Maturity 2.62 yrs
Average Duration 2.35 yrs
Average Coupon 4.58 %
Average Quality AA+ (Only one notch lower than the very top grade AAA)
For taxable accounts, an added bonus is that the income is tax-free since virtually all the issues held are municpal bonds.
|Fixed Income Accounts Composite Performance History (%)
Net of Fees
||Lang Fixed Income
Tax-Exempt Accounts (%)
|Lang Fixed Income
Taxable Accounts (%)
|Fixed Income Index (%) (1)|
||0.13 ||Date to
|(1)The Fixed Income Index is comprised of Barclay's Intermediate US Treasury Bond Index from years 2000 through 2013. From that period forward, due to the fact that Lang has shortened its bond maturities in the portfolios, the index used for comparison is the Merrill Lynch One to Five Year Tax-Exempt Index.
It cannot and should not be assumed that future results will be profitable or will equal or exceed past results. Brokerage commisions and Lang Asset Mgt fees are included.
. We will discuss all of the alternatives, and develop an appropriate bond portfolio to meet your income and capital preservation needs.
In our view, the best investment alternative for investors with
these objectives at this time is our short maturity bond management approach. We adamantly oppose the use
of bond mutual funds. There are several examples of the halving in price of some bond mutual funds as interest rates rose. The hidden risks of lower quality bonds often found in these portfolios, as well as the more recent practice of including complex derivative transactions such as credit default swaps, collateralized debt obligations and inverse floaters are troublesome. The following few paragraphs compare the
difference between our approach and bond funds (see bottom of page
Why a short bond structure is superior to a bond fund?
The characteristics of a short maturity bond portfolio (comprised of individual bonds that have
maturities that are limited to 6 years) and a bond fund are quite
Principal at risk: Since a bond fund is a vehicle that holds numerous individual
bonds, it has no specific maturity. A bond fund is purchased at a particular price (called
net asset value, or NAV), and this price will fluctuate according to the movement of
interest rates. Investors cannot hold a bond fund to maturity because there is no
maturity. Therefore, there is no guarantee of the return of the original investment
(principal) in a bond fund.
In our short maturity bond portfolios, however, because each bond has a specific maturity date,
at which time the principal will be returned (assuming high-grade issues are held), there is little
chance of loss. This represents a major difference!
Quality at risk: With the exception of government bond funds, a bond fund may
hold numerous bonds of lower quality ratings in order to achieve a higher return. They may include bonds that have complex derviatives that have never been tested under adverse market conditions. They represent another potential unknown hazard.
Our bond portfolios maintain defined high quality standards (AAA/AA).
These distinctions are significant for a bondholder:
If interest rates trend higher, an intermediate or long-term bond fund's net
asset value (NAV) may decline significantly with no prospect of recouping the loss. Short-term bond funds will be more likely to maintain their
original NAV. Individual bonds in a short maturity portfolio will experience minor
market losses prior to maturity, but if each individual bond is held to maturity, no realized losses will occur, and the par value of each original investment will be returned.
If a long-term bond fund were purchased between 1920 (7.31 unit value) and 1946 (12.4
unit value), the owner would have experienced an increase in price in the investment
because interest rates fell (6.4% to 2.44%).
*However, when long-term bond funds were purchased between 1946 and 1975 (a 30 year
time span), up to 55% unit value losses were sustained because
of rising interest rates. Since there is no maturity for a fund, there is no way for investors to recover their original investment. A shorter average maturity portfolio does not pose the same risk. (2)
Most bond fund managers face significant competition from their peers, and
are, therefore, strongly inclined to maximize their fund's yield by buying lower quality
issues. The problem for the fund holder is that most funds do not disclose their holdings, making it nearly impossible to identify potential downgrade situations and any other problems which may arise.
The most reasonable approach for a person that is interested in safety and stablity of income is to acquire individual bonds of the highest quality, and with specific shorter maturities.
This should minimize the possibility of significant losses of principal, and provide minimal income risk. An added positive dimension is that if interest rates rise, the portfolio is very defensive in nature since the bonds average maturity is about 3 years.
(2)Source: Standard & Poor's Corporate Bond Yield Indexes
The following displayed portfolio is typical of our clients' bond holdings. We must say it is a beautiful looking display!
All the bonds are rated AAA or AA, a very high quality exhibit. It is also a very defensive list of bonds. So if interest rates rise, any potential losses should be minimal, since all securities will mature reasonably soon, the longest due in 5 years, and the average due in 2.5 years. This should be very comforting in these perilous times. The portfolio is well diversified, with 19 different issues held, none representing more than 8% of the total.
Example of a typical high quality Bond Portfolio
If our approach is of interest to you, please contact us at:
Lang Asset Management, Inc.
171 Village Pkwy., Bldg 8A
Marietta, GA 30067
Phone: (404) 256-4100
Fax: (404) 256-1473
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