Rather than building an investment strategy on ephemeral market forecasts, we prefer to look for the known risks and opportunities and weigh them against probable outcomes. We can never know when a certain trend will turn, but we should be aware of those things that are unsustainable and position ourselves accordingly.
To that end, we’ve upgraded the quality of our fixed income holdings this quarter in response to growing risks in corporate bonds. The lowest quality tranche of “investment grade” bonds, the BBB-rated tranche, used to make up 35% of all investment grade bonds. Now it’s over 50%, and these companies are more leveraged than ever. The loan covenants meant to protect investors have also weakened dramatically. It’s a precarious place to be this late into an economic cycle. When the economy slows, these companies will have a harder time than others, and so will their bonds. We expect a lot of these BBB-rated bonds to be downgraded to “junk” status, which will force selling and depress prices. We don’t know when that will occur, but we’re positioning ourselves defensively in advance, as we don’t feel that investors are being adequately compensated for the risks.
We design portfolios to be durable and to deliver value over the long-term. We know that markets are unpredictable over the short run, which is why we don’t create portfolios that put you at the mercy of trade negotiations, tariff talks, elections or other such ephemera. Instead, your portfolio is built to meet your long-term financial needs, regardless of market outlook. The markets won’t always give us the kind of returns we’ve seen so far this year, and at times it will require superhuman patience and discipline to stick to the plan, but ultimately a well-designed, well-executed strategy will succeed.
Ashley Vice, CFA, CFP
Portfolio Manager
For Ashley’s full market analysis, click here.
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Historical performance returns for investment indexes and/or categories, usually do not deduct transaction and/or custodial charges or an advisory fee, which would decrease historical performance results.
