Since the market value of a bond is dominantly influenced by current and prospective interest rates, Greystone’s fixed income decisions are primarily driven by our expectations for interest rates and the shape of the interest rate yield curve.
Turning this into a concrete portfolio involves three steps: setting portfolio maturity (duration) strategy, ensuring sector diversification and seeking value in individual security selection.
Like our approach to equities, Greystone uses fundamental and technical analysis in combination. Fundamental analysis looks at current economic and monetary conditions, and the to develop our duration and yield curve strategy. Duration measures the “life” of a bond portfolio and helps determine risk. The bond yield curve charts the interest rates or yields that are earned by various maturities.
For example, if we anticipate lower yields, we would move to a duration longer than the benchmarks. Conversely, if we thought yields were going to increase, we would reduce duration. In other words, our objective is maximizing the return in a falling yield environment and minimizing the risk in a rising yield environment
Our secondary focus is on diversification — the weighting of debt instruments within the portfolio. Diversification accomplishes two things: reduced risk and enhanced returns.
Even when market conditions don’t warrant changing duration, we continue to look for opportunities that we can exploit without affecting our overall strategy. For example, we will sell and buy securities with similar maturities but different yields, thus adding value without changing the overall duration.
Like our equity classes, our fixed income investment style is risk-conscious, but in no way static. We’re active traders, ready to seize the frequent opportunities that present themselves – to lengthen or shorten maturity and duration, shift among sectors of the bond market, and be more or less aggressive in terms of security selection – but always within prudent limits. Our objective is to safeguard our clients’ capital and achieve a superior rate of return.