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Portfolio managers anticipate and respond to changing market conditions such as:
- Interest-rate trends
- Economic outlook
- Federal Reserve policy
- Sector valuations
After analyzing these variables, managers establish current strategies and maturities for the portfolios. Securities are selected from a broad base and are evaluated on their status in the following categories:
- Current yield
- Credit quality
- Call risk/protection
- Coupon structure
- Capital gains potential
- Inefficient pricing
Generally speaking, management focuses more on structural bond analysis than credit analysis. Management believes that there are good opportunities to capitalize on the market's inefficiencies by investing in securities with unique characteristics that may help to reduce portfolio volatility and enhance yield. Our research staff carefully analyzes the structural features of asset-backed and mortgage-backed securities.
Sell discipline
- Current portfolio-maturity profile no longer met by bond
- Significant negative change to credit rating
- Development of more attractive investment opportunity
- Taking advantage of capital gains without compromising long-term income returns
- Calling of bond
Portfolio characteristics
Government Securities1
- U.S. Treasury and government agency bonds, including mortgage-backed securities (MBS)
High Quality Taxable1,2,3
- U.S. Treasury and government agency bonds
- Investment-grade corporate bonds
- Investment-grade mortgage-backed (MBS) and asset-backed (ABS) securities
High Quality Tax-Free4
- Municipal bonds with interest income exempt from federal income tax
Special Fixed Income1,2,3,5
Eagle retains full discretion to determine a portfolio's allocation among the following:
- U.S. Treasury and government agency bonds
- Investment-grade corporate and municipal bonds
- Investment-grade mortgage-backed (MBS) and asset-backed (ABS) securities
- High-yield corporate bonds, convertible securities and preferred stocks
Core Fixed3
- U.S. Treasury and government agency bonds
- Investment-grade corporate bonds
- Investment-grade mortgage-backed securities (MBS) and asset-backed securities (ABS)
- Normal cash level: 5% or less
Risk Information
Risks associated with Fixed Income investing: many investors consider bonds to be "risk free" investment vehicles. Historically, bonds have indeed provided less volatility and less risk of loss of capital than has equity investing. However, there are many factors that may affect the risk and return profile of a fixed-income portfolio. The two most prominent factors are interest-rate movements and the creditworthiness of the bond issuer. Bonds issued by the U.S. government have significantly less risk of default than those issued by corporations and municipalities (see footnotes 3 and 5 below for a discussion of the risk associated with high-yield bonds and convertible securities). However, the overall return on government bonds tends to be less than these other types of fixed-income securities. Investors should pay careful attention to the types of fixed-income securities that comprise their portfolio, and remember that, as with all investments, there is the risk of the loss of capital.
Not every investment opportunity will meet all of the stringent investment criteria mentioned to the same degree. Trade-offs must be made, which is where experience and judgment play a key role. Accounts are invested at the discretion of the portfolio manager and may take up to 60 days to become fully invested.
(1) Asset-backed securities and mortgage-backed securities are created by pooling loans from a variety of sources and issuing bonds that are backed by these loans. Creditworthiness stems from the credit quality of the underlying loans, as opposed to corporate bonds in which creditworthiness is derived from the earning power of the issuing company. The primary risk of these securities is interest-rate risk. Rising interest rates might cause loan principal prepayments to slow, resulting in less available principal to invest at prevailing higher rates. Conversely, rate decreases might accelerate prepayments, leaving more dollars to invest at lower rates.
(2) Investment grade refers to fixed-income securities rated BBB or better by Standard & Poor’s or Baa or better by Moody’s.
(3) Convertible securities and preferred stock combine the fixed-income characteristics of bonds with some of the potential for capital appreciation of equities and, thus, may be subject to greater risk than pure fixed-income instruments. Unlike bonds, preferred stock and some convertible securities do not have a fixed par value at maturity, and in this respect may be considered riskier than bonds. Convertible securities may include convertible bonds, convertible preferred stocks and other fixed-income instruments that have conversion features.
(4) Accounts using High Quality Tax–Free may only be available at select broker/dealers.
(5) Investments in high-yield bonds and convertible securities are subject to the client’s authorization, as set forth in the Investment Management Agreement. Such investments may be subject to greater risks than other fixed-income investments. The lower rating of high-yield bonds (less than investment grade) reflects a greater possibility that the financial condition of the issuer or adverse changes in general economic conditions may impair the ability of the issuer to pay income and principal. Periods of rising interest rates or economic downturns may cause highly leveraged issuers to experience financial stress, and thus markets for their securities may become more volatile. Moreover, to the extent that no established secondary market exists, there may be thin trading of high-yield bonds, which increases the potential for volatility.
Be sure to consider your financial needs, goals, and risk tolerance before making any investment decisions. Eagle does not provide legal, tax, or accounting advice. Any statement contained in this communication concerning U.S. tax matters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Before making any investment decisions, you should obtain your own independent tax and legal advice based on your particular circumstances.
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