NEW YORK (FMD Capital Management) -- The woosh that you just heard is the air being let out of stocks in January and a flight to quality in Treasuries that has reasserted the need for a balanced income strategy.
At the end of last year it seemed that the mainstream bias had convinced us that bonds were a death trap in the face of rising interest rates and stocks were the only place to be. Well, that didn't last long....
If history has taught us anything, it's that being overweight or over enthusiastic about a specific area of the market can lead to taking on a greater amount of risk than you bargained for. This is especially true when the tide begins to turn and volatility returns with a vengeance. That is why I am a big advocate of keeping a balanced mix of dividend paying equities and fixed-income in the portfolio to mitigate severe price swings.
While that means I may be giving up a certain amount of upside in a rapidly rising market, I am willing to trade that opportunity for being able to sleep well at night when price fluctuations are sending others reeling.
As an active manager, I am always looking to shift my portfolio to areas of the market that I feel offer the best returns given the circumstances and prevailing risks. Last year I shifted my fixed-income exposure to short duration high yield, floating rate notes, and active risk managed funds that mitigated the risk of rising interest rates.
In addition, I held on to core positions in the Pimco Income Fund (PONDX) and Doubleline Total Return Fund (DBLTX), which are both back to trading near all-time highs based on a combination of security selection and falling interest rates. While we had to endure some mild volatility last year, these positions provide a strong case for monthly income and manager expertise in select fixed-income sectors that outperform. Those who held through the fray were rewarded with significant outperformance vs. a traditional benchmark such as the iShares Aggregate Bond ETF (AGG).