Fixed Income
Overview and Process
Investors hold fixed income securities to effectively budget total portfolio risk, and we believe this is best accomplished without credit risk. Therefore, we do not hold corporate bonds in client portfolios. Our clients' fixed income portfolios contain only U.S. Treasuries, government agency bonds, and government agency mortgage-backed securities (MBS).
We emphasize MBS in client portfolios due to their historical yield spread relative to the U.S. Treasury yield curve. Furthermore, MBS issued by government agencies are either explicitly or implicitly guaranteed by the U.S. Treasury. Treasury bonds and non-callable government agency bonds are also included in client portfolios to reduce the negative convexity and prepayment risk associated with MBS.
The DBF fixed income management process begins with a comprehensive top-down economic forecast. From our economic forecast we develop a Treasury yield curve forecast over a six to twelve-month horizon. Given our yield curve forecast, we position client portfolios to take advantage of anticipated interest rate and yield spread movements while keeping within the duration limits mandated by each strategy. Slight duration tilts and individual security selection add value, along with tactical coupon and maturity selection. Spread risk is managed through issuer diversification. The size and depth of the Treasury, MBS, and government agency bond markets results in all securities held in client portfolios being extremely liquid.
Our fixed income management process is consistent and disciplined. As you examine our 20 year track record, keep in mind we have achieved this performance with negligible credit risk in client portfolios. Our long-term returns relative to broad benchmarks are a testament to our successfull approach.