Generating income in such a low interest rate environment without taking on unnecessary risk is difficult. We are very sensitive to adding risk in general and especially for our clients who depend on consistent income streams. To that end, we have put together a group of fixed income products into a Core Income Strategy that has performed well. All of the funds pay dividends on a monthly basis addressing the needs of those who depend on the income for routine expenses during the year. The monthly payment streams also hedge against rising interest rates since those payments can be reinvested at prevailing rates when received.
Composition
There are four components to the strategy. Here is how each manager describes their fund objectives.
- Lord Abbott Floating Rate Fund (Symbol: LFRAX) monthly
- The Fund seeks to deliver a high level of current income by investing primarily in a variety of below investment grade loans.
- Lord Abbott Inflation Focused Fund (Symbol: LIFAX)
- The Fund seeks to deliver total returns that exceed the rate of inflation in the U.S. over a full inflation cycle and current income by combining investments in inflation-linked derivatives with a portfolio of fixed income securities.
- PIMCO Income Fund (Symbol: PONAX)
- Seeks to maximize current income; long-term capital appreciation is a secondary objective
- PIMCO Mortgage-Backed Securities (Symbol: PMRAX)
- PIMCO Mortgage-Backed Securities Fund offers attractive, actively managed risk- adjusted return potential from mortgage-backed securities (MBS) – one of the largest and most liquid fixed income sectors.
Strategic Reasoning
The titles of each fund give you an idea of their strategy. Our goal is to protect the invested principal from loses should interest rates gradually rise in the coming quarters, as most people expect. As I wrote in my last commentary, we expect long term interest rates to remain fairly stable which does imply the possibility of a gradual increase over time (6-18 months) back to pre-pandemic levels. Inflation risks remain a key element to the strategy which has led to the Lord Abbott Inflation Focused Fund to materially outperform since the start of the year.
Combining these four income strategies balances out downside and upside risks in interest rates leading to a solid 3.0-3.5% return year to date. The chart below shows the combined return of the four funds since the start of the year.
Overtime, we make changes to the portfolio composition as the economic environment continues to evolve, albeit in a choppy fashion. At times, we change how much we allocate to each of the funds and when we feel appropriate, we swap out a fund with one that we feel has better prospects as market conditions change. We are confident in our cash management strategy and recommend it for holding cash assets as part of a broader investment portfolio. It is also the strategy we recommend for clients who are looking to keep aside cash for planning purposes such as a home purchase or home improvements, or simply an emergency fund which we always recommend clients maintain to protect against lost wages or other unforeseen circumstances.
Closing Thoughts
The markets continue to perform well albeit the conflicting economic themes that continue to dominate the discussion. The tug of war between fears of inflation and the path of economic growth continues. In late March, inflation fears drove the 10 yr Treasury rate to a 14 month high of 1.72%. That same rate now sits at 1.32%. As history keeps repeating, slowing growth leads to more economic stimulus (or at least the continuation of current stimulus) which can boost higher long term growth expectations. And for those who feel they may have missed the boat on lower mortgage rates, it’s time to get those mortgage refi’s going again!!
Please call at any time to discuss.
We hope the summer is starting out well for everyone!
