For fixed income investors, the desire for yield has been all encompassing. With yields at zero (or worse), many RIAs have expanded their search for yield into every asset class and every structure: high yield, MLPs, REITs, dividend paying stocks, etc. Terms such as “alternative income” and “bond substitutes” have become commonplace. At Bramshill Investments, we manage absolute return solutions in fixed income and income producing assets. We understand the challenges RIAs are facing; as portfolio managers, we are facing them as well. In this environment, the team at Bramshill Investments is proceeding with caution, and we’d like to share some cautionary considerations related to risk.
Absolute yield is NOT enough. Investors should also consider how much interest income would be required relative to the risk of that asset class. Below are a few metrics to consider:
- Yield relative to Duration
- Yield relative to Credit Quality
- Yield relative to Liquidity
- Yield relative to Max Drawdown
- Yield relative to Volatility
Today's market participants generally believe low rates and an accommodative Federal Reserve will prevail for the foreseeable future. At Bramshill, we disagree (more on our views in recent commentaries here and here). We believe quality yield will become important and risk management in core fixed income will become a critical component of an RIA’s asset allocation. We look forward to sharing additional market insights on the above topics in coming blog posts.
What are the primary risks you are concerned with in building a fixed income allocation? The team would love to hear your thoughts! Please leave us a comment below.