Fixed Income/Bonds
At Reyes Capital, we strive to promote the creation and preservation of wealth. To us, the purpose of fixed-income (more commonly referred to as bonds), is to preserve the current level of assets and provide a safe, reliable and consistent income stream. To that end we do not attempt to predict the precise direction or level of interest rates in the future. We do, however, analyze the general interest rate environment and manage our clients’ portfolios accordingly.
The appropriate fixed-income allocation for each client is different, and once again depends on their goals, risk tolerance and time horizon. However, the first questions that must be answered when considering fixed-income, concern the client’s income-tax situation. “What is the client’s current income-tax bracket?” This question will guide us toward the appropriate type of taxable or tax-free fixed-income security. “How is the client’s tax bracket expected to change in the future?” This question will help Reyes Capital determine if the current fixed-income product is appropriate for the intermediate and long-term as well.
Once all of the factors listed above are determined, the fixed-income portfolio can be designed. The overall maturity of the portfolio, also known as its “duration”, is an important consideration that is decided upon after close consultation with the client. This decision is usually driven by the need for a certain level of income - in general, the longer the maturity or duration of the portfolio, the higher the level of income that can be generated.
The other principal factor in determining a portfolio's income level, or yield, is the relative safety of the securities purchased. In general, the safer an investment is deemed to be, the lower its return and vice-versa. Prior to purchasing a security, we analyze the risk ratings of that issue as determined by the two major credit-rating agencies, Moody’s and Standard & Poor’s. Subsequent to the purchase, we monitor any rating changes and may act accordingly.
After deciding on the overall design of the portfolio, purchasing of individual bonds begins and the portfolio is constructed. In general, individual bonds are purchased and held to maturity in a process known as laddering. Laddering is the technique of spreading the fixed-income investments over a range of maturities, from short-term to intermediate and long-term. This is the best way to preserve each and every dollar of capital, as well as ensure the desired income stream, regardless of the direction and magnitude of interest rate moves. Laddering also ensures that there will be sufficient liquidity throughout the life of the portfolio to cover unforeseen client needs.
Somewhat similar to the construction timeline for equity portfolios, the amount of time necessary to build a fixed-income portfolio can vary greatly. Depending on market conditions and the availability of the specific securities needed, the portfolio may take anywhere from a few days, weeks or even a number of months to complete. At Reyes Capital we always prefer to invest in the highest quality, AAA investment grade fixed-income securities. We utilize investment grade corporate and municipal bonds, as well as government and agency issues. CD’s and money market funds are also utilized, primarily to address short-term and cash management issues. Other, more esoteric securities may also be employed for specific situations.
