Post on 24-Dec-2015
Build a Better Bond
James C. McClendon, Chief Investment Officer & Managing Director
Interest Rates
Fixed Income Sector Returns
Source: J. P. Morgan Asset Management
Treasuries
Mortgage Related
Corporates
AgenciesAsset Backed
The Bond Market Has Many Different Components
Total Bond Market
Interest Rate Sensitive Economically Sensitive
Fixed Income market has changed
Source: Guggenheim Partners, SIFMA, Credit Suisse, Barclays. Data as of June 30, 2013
Global Bond Market• Bond market has evolved, so
has volatility
Global Opportunities = Higher Vol
STANDARD DEVIATIONIndex 1 Year 3 Year 5 Year
Barclays US Aggregate Bond Index 2.58 2.67 2.83
Barclays Global Aggregate Bond Index 4.18 4.17 5.19
JPMorgan Emerging Markets Bond Index 6.37 8.02 7.40
Price Impact of 1% Change in Interest Rates
• Large impact on returns across sectors with 1% increase in rates.
• No where to run• No where to hide
Price Impact of 1% Change in Interest Rates
• Floating Rate Fixed income Portfolio would be down -0.1%
• 30yr UST Portfolio would be down -17.4%
Portfolio returns could range
from -0.1% to -17.4%
Taper Tantrum
4 month return = -4.5%
11
Taper Tantrum
4.5% Drawdown
Rolling Returns
• One Year Rolling Returns
J F M A M J J A S O N D J F M A
Rolling Returns
• Three Year Rolling Returns
JFMAMJJASONDJFMAJJASONDJFMAMJJASONDJFMAMJJASONDJFMAMJJASOND
Barclays Intermediate Government/CreditRolling Returns 1 – 15 years
1 3 5 7 9 11 13 15 17 19 21 23 2518.06% 15.19% 11.18% 11.15% 11.07% 9.77% 9.68% 9.48% 8.98% 9.02% 8.51% 8.02% 7.88%-1.93% 2.90% 3.99% 4.39% 4.23% 4.13% 4.94% 4.98% 5.36% 5.76% 5.58% 6.05% 6.44%7.23% 7.16% 7.06% 7.03% 6.95% 6.92% 6.95% 6.93% 6.95% 6.96% 6.93% 7.00% 7.05%
Expectations of Return
• For Returns: BONDS*Average Return Range of Returns
1 Yr -1.93 to 18.13 Yrs 2.90 to
15.195 Yrs 3.99 to 11.187 Yrs 4.39 to 11.159 Yrs 4.23 to 11.0711 Yrs 4.13 to 9.77
1 Yr 7.233 Yrs 7.165 Yrs 7.067 Yrs 7.039 Yrs 6.9511 Yrs 6.92
*BARCLAYS INTERMEDIATE GOVT/CREDIT Interm Index (1/1/1984 through 12/31/2013)
Interest Rates
Rates and bond prices move in opposite directions
A Better Bond Portfolio
Bonds
Equities
TraditionalBalanced Portfolio
Traditional Balanced Portfolio
• Combining stocks and bonds in a Balanced Portfolio offers investors diversification and an opportunity to achieve improved risk-adjusted performance
Bridging the performance gap between stocks and bonds (10yrs)
100% 100% 60% StocksBonds Stocks 40% Bonds
2003 4.10% 28.68% 18.64%2004 4.34% 10.88% 8.35%2005 2.43% 4.91% 3.94%2006 4.33% 15.79% 11.14%2007 6.97% 5.49% 6.19%2008 5.24% -37.00% -21.63%2009 5.93% 26.46% 18.46%2010 6.54% 15.06% 12.19%2011 7.84% 2.11% 4.98%2012 4.21% 16.00% 11.37%2013 -2.02% 32.39% 17.73%
Annual Returns
S&P 500 TR
Traditional Balanced Portfolio
Barclays Agg Bond
22
Drawdown (10 yrs)
Taper Tantrum
4 month return = -4.5%
How did Traditional Balanced Portfolio performed during 4/2013 through 11/2013?
24
Taper Tantrum
Barclays drop = -4.5%
Traditional Balanced drop = -1.3%
Traditional Balanced Portfolio• The 60/40 Traditional Balanced portfolio provides
an opportunity for improved risk-adjusted performance, capturing 90% of the return delivered by equities with only 65% of the volatility
Equities
Bonds
Risk/Reward profile
Traditional Balanced Portfolio
• Higher return than Bond Portfolio• Lower volatility than Equity Portfolio• Steady, consistent, predictable returns
A Better Balanced Portfolio
TPFG Better Balanced PortfolioGuarantee no annual lossUse annuities to offset equityStrong risk-adjusted-returns
TPFG Better Balanced Portfolio
Annuity
Equities
TPFGBalanced Portfolio
30
TPFG Balanced 30% Fixed, 70% Equity
Traditional Balanced
TPFG Balanced 50% Fixed, 50% Equity
TPFG Balanced 70% Fixed, 30% Equity
Barclays US Agg Bond
S&P 500
Taper Tantrum
4 month return = -4.5%
How about TPFG Better Balanced Portfolio performance during this time?
Taper Tantrum
Barclays Agg with 0% loss
Barclays Agg.
33
Taper Tantrum
Traditional Balanced drop = -1.3%
Barclays drop = -4.5%
TPFG Better Balanced Portfolios never dropped below zero
Deliver predictable results with reasonable risk
TPFG’s ROLE
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