How our active management benefits clients...

Fixed income portfolios are as amenable to active management as equity portfolios. Not only do client objectives change, but opportunities and risks shift in response to changes in a variety of global and local economic factors. Our preference is to avoid transaction costs by designing portfolios that require relatively low turnover.

Nonetheless, we regularly identify opportunities to adjust portfolios where the rewards of the new design far outweigh the transaction costs. Below, for the purpose of illustration, is an actual example of the benefits of active management.

Classic Maturity Extension Trade

During the third quarter of 2008, the market presented two dynamics not seen in the past several years: steepening of the yield curve and a widening of credit spreads. The "yield curve" refers to the relationship between the length of time to maturity of a bond and the rate of interest earned (yield). Simultaneously the impact of the credit crisis and the downgrading of bond insurance resulted in the widening of yields between securities of varying credit quality not seen in over twenty years.

This combination of market conditions enabled us to extend the maturity of an investment 9½ years... from 2009 to 2018, capturing an additional 284 basis points of tax-exempt yield or 30 basis points per year of extension. (Under normal market conditions, such an extension would have increased yield by approximately 80 or 90 basis points.) By swapping into bonds with a lower published rating, but well within our prudent standard of minimal risk we substantially increased portfolio yield. The tax-exempt yield for the purchased security rose from 1.74% to 4.58% (6.84% tax equivalent yield).