Alhambra Portfolio Update: World Bond

Alhambra Portfolio Update: World Bond

By |2011-09-03T02:48:54+00:00September 3rd, 2011|Markets|

Alhambra vs. PIMCO

Below is a comparison between the Alhambra World Bond Model Portfolio and the PIMCO Low Duration mutual fund Class A (PTLAX) shares for one year ending August 31, 2011.

 

 

 

 

 

 

 

 

 

 

Our World Bond Model Portfolio returned 6.30% vs. 2.52% for the PTLAX (Class A), a Morningstar 4-star rated mutual fund and managed by legendary fund manager, Bill Gross.

The New York Times called Gross, “ the nation’s most prominent bond investor”.  He is also commonly known on CNBC as the “Bond King”.  Morningstar named Mr. Gross and his investment team Fixed Income Manager of the Decade for 2000-2009.

 

About World Bond

Objective:

The primary objective of the World Bond Portfolio is capital preservation. The benchmark for this portfolio is the 1-3 Year Treasury index.

Construction:

The portfolio’s default asset is iShares 1-3 Year Treasury ETF (SHY). Alternative fixed income assets are added to the portfolio and SHY is reduced using the dynamic process described below.

Dynamic Investment Process:

There are three variables we consider in constructing our World Bond fixed income portfolio:

  • The shape of the yield curve
  • The yield spread across the quality spectrum
  • The trend of the US dollar

Alhambra’s proven investment process sets long term market expectations and determines optimal risk exposures based upon our macroeconomic assessment of the global investing environment.  As a supplement, we continuously monitor monetary and fiscal policy around the globe along with key cyclical indicators.

There are two extremes seen repeatedly in the US bond market. The first structure is the one we have right now. The yield curve is relatively steep – there is a wide difference in yield between short term and long term yields – and there is a relatively large spread between high and low quality bonds. The second structure is the one that prevailed at the end of 2007. The yield curve was very flat (at times inverted) and the spread between high and low quality was minimal. The bond market moves from one structure to the other as the economy goes through cycles of growth and recession.

When the yield curve is steep, as it is now, we tend to reduce the maturity of our investments. The assumption is that over time, as the economy recovers, the yield curve will flatten as the Fed raises short term interest rates. At the same time, with a wide spread between high and low quality bonds, we will tend to increase our exposure to lower quality bonds. That means reducing Treasury exposure in favor of corporate, high yield (junk) and emerging market bonds. As the economy recovers, the spread between high and low quality bonds will tend to narrow.

When the yield curve is flat or inverted, we will increase the maturity and quality of our portfolio. The shape of the yield curve is a leading indicator for the economy. A flat or inverted yield curve almost always precedes a recession. During a recession yields of long term Treasuries will usually fall more rapidly than short term Treasuries and generate more total return. The spread between low and high quality bonds will also rise as investors fear the loss of principal in low quality bonds.

Lastly, we consider the trend of the US Dollar in constructing our portfolio. Foreign currency denominated bonds will outperform US dollar bonds when the dollar is falling. We generally only invest in foreign currency government bonds.

If you would like more detailed information about our World Bond Portfolio, please call your Alhambra representative or email us at info@alhambrapartners.com

 

DISCLAIMER

 

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