At Litman Gregory, our research team is always on the search for more for our clients. Sometimes that means more return, and sometimes more safety, but it often means searching for solutions that aren’t readily available through traditional options.
In this era of historically low yields and interest rates, and therefore corresponding high prices of bonds, our current quest is to find higher income, without adding to the overall risk in our clients’ portfolios. Because we see higher risk to bond prices from rising interest rates, our research team believes that this is indeed a challenging environment for investors in the traditional fixed income markets.
We’ve already addressed some of this challenge by replacing part of the traditional fixed income in our portfolio with bond managers who specialize in less traditional areas of the fixed income markets including short-maturity high yield bonds and “floating-rate notes.” These tactical shifts helped us with this quest for better yields and lower risk during rising interest rates, while producing returns that outperformed the overall “core” bond market.
This year, we’re building an even more compelling way to include income strategies for our clients, using investment managers who can go beyond traditional core investment-grade bonds. Through their expertise in less-well-known areas of the fixed income market, they are able to run strategies that provide alternative sources of income that many investors are less likely to buy on their own. These managers generate higher income while still keeping an eye on preservation – an important characteristic in our portfolios, because we use fixed income in part as a safety net during stock market declines (and for this reason we will always own core bonds as well).
We narrowed our selection to four managers, each of whom has a strategy for identifying attractive income/return-generating securities generally in less traditional and/or less efficient areas of the financial markets. This can include specialized areas of bond market such as asset backed securities, floating rate loans and structured finance investments, but also other areas like mortgage REITs, business development corporations, convertible & preferred securities, and option-writing strategies. As a collective, we believe these managers will add beneficial diversification, and higher income, to complement the more traditional bonds in our clients’ portfolios.
Each client’s situation is different, so we are careful to consider individual needs and goals when we add new investments like these. But for the fixed income portion of all the portfolios we manage, we believe there is a strong role for these strategies in generating higher income while helping protect from the risk of rising interest rates.
If you would like to discuss how we would add these non-traditional income securities into your portfolio, please talk with your Litman Gregory Wealth Advisor about your own quest for income.
Commentary from Our CIO—Second Quarter 2021
Global stock markets continued to surge in the second quarter. In our assessment of the macroeconomic backdrop and outlook, we continue to expect a strong global economic recovery over at least the next 12 months. In this quarterly commentary, our Chief Investment Officer, Jeremy DeGroot, reviews the current reasoning for our portfolio positioning, outlook on inflation, and forward-looking scenario analysis on the broader economy and markets.
Research Update: Increased Return Expectations for U.S. Stocks
As the economy and financial markets continue their recovery from the pandemic’s impact, our recent analysis resulted in improved expected returns for U.S. stocks. In this post we summarize our analysis and why we think an increased allocation to U.S. equities could benefit the risk-adjusted return profile of our portfolios.
Advisor Q&A: Tax Planning and the American Families Plan with Senior Advisor Chris Wheaton
The American Families Plan was recently released by President Joe Biden and includes many of the provisions outlined during his campaign. We asked Litman Gregory Senior Advisor, Chris Wheaton, to answer some questions about key proposed tax law changes, and related tax planning ideas for our clients to consider in 2021 and beyond.