KFAC – Background on Recent Fixed Income Trades

Nicholas Coppola, CFA

February 22, 2019

At Kays Financial, we believe that fixed income allocations should serve multiple purposes for our clients. Objectives include capital preservation, liquidity, an attractive total return, and diversification from equities, which typically provides a ballast to portfolios during economic downturns (as we all know, downturns are unfortunately inevitable over a long enough time-line). It’s in the balancing of these objectives that we seek to add value. For example, push too hard on returns and you compromise capital preservation. Alternatively, push too hard on capital preservation and you compromise returns. Along those lines, our trades earlier this week were largely a rebalancing of fixed income portfolios as we consider our objectives relative to our expectations for a number of variables, including interest rates, the economy, and more granularly, our expectations for each asset class within fixed income. 

While changes to portfolios varied by account, there are a few common themes. First, with corporations having increased their leverage (i.e., their debt relative to profitability) and a greater share of investment-grade debt falling lower in the credit rating scales, we are reducing our investment-grade corporate exposure.  In order to achieve that, we exited our SPDR Bloomberg Barclays IG Floating Rate ETF (FLRN) positions and trimmed our Vanguard Short-Term Corporate Bond ETF (VCSH), and Vanguard Intermediate-Term Corporate Bond ETF (VCIT) positions. In most accounts, we’ve also added exposure to the iShares Short-Term Treasury Bond ETF (SHV) and the Vanguard Mortgage-Backed Securities ETF (VMBS). Importantly, from a credit perspective, US Treasuries and agency mortgages are conservative positions that add ‘ballast’ to our fixed income portfolios. 

Looking to our potentially higher return (and thus higher risk) allocations, we are adding greater diversification. In order to achieve this, in most accounts, we reduced our allocation to the Invesco Emerging Market Sovereign Debt ETF (PCY) and added a new position in the Voya Securitized Credit Fund (VCFAX). Note that Securitized Credit has had a low correlation to the S&P 500 and the universe of US investment grade fixed income, and carries exposures primarily to non-agency residential mortgages, commercial mortgages, and a variety of asset-backed securities tied to consumers and corporations. And as far as the consumer is concerned, we like that households have yet to increase their debt levels to the same extent as corporations (i.e., measured by household debt relative to income). As a result, we are happy to add a fund that we expect to benefit from stronger household balance sheets. 

Thank you and please don’t hesitate to contact your advisor if you have any questions about recent trades or your broader portfolio.

 

Sincerely,

Nick Coppola, CFA

Senior Portfolio Manager

Nicholas Coppola, is a Senior Portfolio Manager at Kays Financial Advisory Corporation. He can be reached at (770) 951-9001 or at ncoppola@scottkays.com.

 

This report and Mr. Coppola’s comments are provided as a general market overview and should not be considered investment or tax advice or predictive of any future market performance. Any security mentioned in this report may not be suitable for all investors. No investment mentioned in this newsletter constitutes a recommendation to buy, sell or hold a particular investment. Such recommendations can only be made on an individual basis after an assessment of an individual investor’s risk tolerance and personal circumstances. Past performance of any investment mentioned is not a guarantee of future performance. Statements regarding the investment concerns and merits of any investment and fair market value computations are strictly the opinion of Kays Financial Advisory Corporation. Employees of KFAC and KFAC clients may have positions and effect transactions in the securities of the issuers mentioned here in.