Our Investment Approach 2: Fixed Income

Genevieve Signoret

(Hay una versión en español de este artículo aquí.)

This is the second in a three-part series on our investment approach. Click here to read Part 1, where we lay out our general approach to building the equity portions of our portfolios.

Our fixed income positions are based on our outlook for global interest rates and exchange rates (which you can track at Timón Económico) and one rule.

The rule is a 10% floor on our target allocation for their investment-grade, nominal (not inflation-protected) fixed-income securities denominated in a safe-haven currency with an average duration of at least five years. It applies to all clients, regardless of their risk tolerance, whose investment horizons are shorter than 10 years.

This rule implies that, except for those periods in which the central banks are raising rates or there is an expectation that they will do so, the fixed income and variable portions of our portfolios will move, on trend, in opposite directions (“they will exhibit negative correlation”).

We think of the drag this rule imposes on portfolio valuations in times of market euphoria or rising interest rates as an “insurance premium.” And we view the losses this rule during market corrections or bouts of panic as the payoff for holding that insurance.

Note that no rule prohibits us from buying, additionally, lower-quality bonds. As long as we’re complying with our 10-percent floor, we are free to buy additional bonds of any maturity or risk rating and denominated in any currency, in accordance with our views. We may also include inflation-protected bonds in that mix.