Ideas for income in a rising rate environment


My kingdom for an investment advisor, say we, who do not believe that interest rates are headed higher. This has been so over the past several years as, with very rare exception, investment advisors currently believe AND have believed that interest rates are headed higher.
We believe that as well but have made a commitment to diversification and also think that no one can accurately predict the direction of interest rates over the short- to intermediate-term. It is for these reasons that we have not sold our allotted percent to fixed income and gone to cash but rather have continued to invest into what we believe are funds with a proven track record, sound management and objectives that conform to our investment risk profile regarding interest rates and credit quality.
Although past performance is no indicator of future results, the following represents some of our larger fixed income fund holdings as of the writing of this column.

Highlighting 5 funds
The first fixed-income fund we would like to highlight would be our largest holding in this asset class, the Doubleline Total Return fund (DLTNX). Managed by Jeffrey Gundlach, this fund invests in securities that mature within approximately twelve years, the majority of which are mortgage-backed. Year-to-date and over the previous one-, three- and five-year periods, the fund has returned 1.04%, 1.18%, 3.04% and 3.60%, respectively, to shareholders.
The second fund we would like to highlight is the MetWest Total Return Fund (MWTRX), managed for nearly twenty years by Tad Rivelle. By prospectus, the fund invests at least 80% of assets into investment-grade fixed income securities. Year-to-date and over the previous one-, three-, five- and ten-year periods, the fund has returned 1.19%, 1.36%, 2.25%, 3.67% and 5.67%, respectively, to shareholders.
The third fund we favor is the Baird Core Plus Bond Fund (BCOSX), managed since the year 2000 by Charles Groeschell. The aim of this fund is to exceed the return of the Barclays U.S. Universal Bond Index by investing at least 80% of assets into dollar denominated bonds. Year-to-date and over the previous one-, three-, five- and ten-year periods, the fund has returned 3.41%, 3.38%, 3.10%, 3.13% and 5.02%, respectively, to shareholders.
The fourth fund of note is the Loomis Sayles Bond Fund (LSBDX). Managed since 1991 by Daniel Fuss and a little racier than the three above, this fund normally invests at least one-half of its assets into investment grade bonds. However, up to 35% of assets can be invested in non-investment-grade bonds and up to 20% into equity securities. Although it has an attractive long-term record of performance, it did not perform well in 2008. Year-to-date and over the previous one-, three-, five- and ten-year periods, the fund has returned 7.93%, 7.58%, 1.92%, 5.33% and 5.80%, respectively, to shareholders.
The final funds we would like to highlight are two Exchange Traded Funds (ETFs), the iShares TIPS Bond (TIP) whose objective is to track the investment results of the U.S. Barclays Treasury Inflation Protected Securities Index by investing at least 90% of its assets into U.S. Government Bonds that carry an inflation hedge. Year-to-date and over the previous one-, three-, five- and ten-year periods the fund has returned 7.54%, 7.13%, 2.37%, 1.73% and 4.36%, respectively, to shareholders.
In conclusion, the above is an effort to point out that although fixed income may be subjectively overvalued, the asset class has delivered and continues to deliver attractive results even in the face of a recent Fed hike as well as the potential for additional ones. Certainly caution is warranted when it comes to fixed income. However, this asset class may provide the perfect offset to a stock market whose biggest enemy may be deflation and not the rise of interest rates.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risk, and fluctuations in principal will occur. Research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 279.1044.


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