For the first time in over a decade, investors are reconsidering the bond holdings in their portfolio. Rising interest rates over the past year have eroded bond values leading to the worst year on record for bond returns (Think SVB). This has impacted bonds with longer maturity the most as they are most sensitive to rate fluctuation. This has sparked conversations among investors and financial advisors to explore other opportunities for yield in their accounts outside of traditional bond funds.
We began an extensive analysis of our fixed income holdings in January. This included several webinars and phone calls with fixed income experts, academics, and one of our bond managers1. These individuals operate and analyze the fixed income market daily. The objective was simple: explore options for fixed income in our portfolios to ensure we’re maximizing investor value where possible. Further, to better understand how these experts view fixed income in this evolving environment. Our fundamental question was:
Do we replace bond funds in our portfolios with short-term treasuries?
There is more to consider than rates or current value when analyzing bond portfolios. As rates increase and prices fall, the total rate of return that will be earned by a bond when it makes all interest payments and repays original principal also increases; known as the Yield to Maturity. While bond values have gone lower, holding them to maturity still means investors will be made whole as the face value of these bonds are repaid over time. Further, our bond managers actively search for new opportunities in the fixed income market every day, replacing underperforming bonds with more attractive holdings.
In summary, our portfolios have always held short maturity and higher quality bonds to hedge against interest rate fluctuation. Using this disciplined method to fixed income which relies on market pricing and actively replacing underperforming bonds with more attractive holdings will continue to be a successful approach.
Fixed Income Refreshers
1Sooyeon Mirda, CFA is an Investment Strategist in Dimensional's Investment Solutions Group. Based in the Austin office, Sooyeon is a member of the Product Specialists team and serves as a subject matter expert on the firm's fixed income investment philosophy and strategies. She supports the firm's fixed income efforts by communicating with clients, prospects, and various intermediaries about their portfolios. In addition, she writes commentary, develops internal and external content on portfolio management and strategies, and is involved with internal training for various distribution channels.
Before returning to Dimensional, Sooyeon worked for Goldman Sachs in San Francisco, where she managed portfolios and developed creative investment solutions for ultra-high-net-worth clients, foundations, and endowments. Before this, she worked for Dimensional as an Associate Investment Strategist in fixed income. Prior to originally joining Dimensional, Sooyeon was part of a fixed income rotational program at AllianceBernstein in New York City, where she focused on credit research and bond portfolio management. A CFA ® charterholder, Sooyeon graduated with honors from Princeton University with a bachelor's degree in economics and minor in finance.