We hope you are having a pleasant summer. I’m sure you are aware of the old adage: ‘Bulls make money in an up market, bears in a down market, but pigs never do.’ In other words, don’t stay too long at the party!
I mention this in regard to our latest modification in portfolio strategy. Portfolio returns, regardless of objective, have been enhanced in recent years by our long-standing positive attitude on interest rates. For instance, the overweighting in portfolios we gave long-term U.S. government bond funds in 2000 were a major factor in the positive returns achieved by all clients for the full year. In the ensuing one-and-a-half years, we have been gradually, but steadily, reducing your exposure to the long end of the curve.
With the rally in long rates over the past few weeks, we felt the time had come to finish locking in profits on those longer-term positions. Accordingly, for those of you with remaining long-term bond fund positions, after the three equity buy programs during July, we have today reduced your exposure to a maximum of 5% in long-term funds.
As always, let me raise the rhetorical question: does this move imply that we feel we have reached the low in rates for this cycle? My answer remains the same as well: no, but one need not call highs and lows, whether talking about stocks or bonds, in order to be successful. One simply has to buy lower and sell higher. We believe we are selling your long-term bond funds higher.”