FIXED INCOME PHILOSOPHY

Many investors believe that bonds are suitable investments only for the ultra-conservative or elderly. Actually, bonds are an important component of a strategically balanced portfolio at most stages of an investor’s life. Generally, a fixed income or bond allocation provides a steady stream of income (through coupon payments) and dampens the volatility of equity markets. Our fixed income portfolios are designed to complement and reduce the risk of our client’s equity investments and as such are intended to be very conservative. Our portfolios are generally A or better in credit quality.

Bonds can be divided into two primary categories, taxable and tax-free. Typically, taxable investments are the best choice for retirement accounts and investors in lower income tax brackets. Municipal (tax-free) bonds are usually the best choice for investors at 25% and higher income tax levels. Taxable bonds include U.S. Treasury and Agency securities, corporate bonds, and foreign bonds (both government and corporate).

Municipal bonds are bonds issued by state and local governments that enjoy an exemption from U.S. income taxes as well as some state and local taxes. Investing in the municipal market is a unique and specialized process because the market is large and bid/ask spreads are wide as a result of light trading volume. According to the Bond Market Association data, the municipal market size is estimated to be $1.7 trillion, with more than 50,000 issuers and over 2 million separate bond issues outstanding. In contrast, the daily volume is relatively small at an estimated $11 billion, or about 3% of the average daily volume of the U.S. Treasury market.