Markets headed higher, apparently relieved that Thursday’s jobless numbers were better than expected and euro zone troubles muted—for now. News that fewer Americans joined the unemployment line last week caused a dramatic drop in the Swiss Franc, historically a “safe haven” currency, which has precipitated a rally in the commodity currencies. Meanwhile, gold is lower and crude is rebounding.
This respite from recent selling pressure has given me the opportunity to discuss our fixed income holdings. Combining bonds with stocks is a sensible way to add diversification to client holdings. Equities “zig” while fixed income “zags” due to their opposite positions in the capital structure of a firm. A corporate action typically benefits either asset at the detriment of the other; this resulting “natural” non-correlation results in volatility reduction when the two assets are combined in a portfolio.
The largest allocation in our fixed income bucket is to the Barclays Aggregate Bond Index (AGG), the most widely used benchmark in the debt space (and our benchmark as well). AGG is equally split among corporates, mortgage and Treasury fixed income securities. Among these three groups, we favor mortgage backed securities, due to our belief that it is a complex sector with significant opportunities for those willing to crunch the numbers.
We achieve our additional mortgage exposure through the DoubleLine Total Return Fund (DBLTX). They treat mortgages as a value play and concentrate on the agency sector. The bonds they buy (typically at a significant discount) allow the fund to have a yield of about 9%.
Corporate bonds are our second favorite group; we gain access to them via exchange-traded funds.