Fixed Income Process

Using a top-down investment process, senior members of our portfolio management team formulate an economic outlook that leads to strategy assumptions. The assumptions outline the likely behavior of interest rates, trends in volatility and the implications for spread relationships among the major sectors of the bond market. The team then establishes target ranges for the various sectors and across the maturity spectrum. This process maximizes potential return within the context of client guidelines, which is the goal of our fixed income strategy.

The Fixed Income Strategy Committee formulates a model portfolio based on each of the major market indices. Each portfolio manager holds responsibility for a group of individual portfolios, and is responsible for their adherence to the appropriate model. In addition, committee members conduct the trading for their respective sectors.

Security selection is facilitated by an examination of credit quality. A combination of internally and externally generated research is utilized in support of a given credit outlook. This process seeks to analyze credit quality in the context of actual security valuation, in addition to gradations of relative default risk.

Consistent examination of historical spread relationships is imperative as part of the sector allocation process. The underlying strategy assumptions normally lead to biases with regard to sector allocation, and historical spread relationships are then referenced to clarify and enhance the specifics of the sector allocation decision. Under normal conditions, exposure to credit-sensitive and structured sectors will not exceed 150% of the market weighting. The duration decision is based on a two step process. First, the strategy assumptions create a bias with respect to relative duration management. Second, a quantitative interest rate model provides an interest rate forecast and a duration recommendation. The strategy team reconciles the two biases into a specific duration target. The resulting portfolio duration target will then be set and subsequently adjusted over time within a prescribed range versus the benchmark, unless otherwise specified by the client. Our yield curve is to remain relatively consistent with the yield curve distribution of the index within the context of our duration strategy.