Taylor Huffman, Client Portfolio Manager at PT Asset Management, joined Julie Cooling, Founder and CEO of RIA Channel, to discuss the flaws in traditional fixed-income methodologies.
Performance Trust Asset Management offers three fixed-income mutual funds and one active fixed-income ETF, the Performance Trust Short-Term Bond ETF (STBF). The ETF targets an average portfolio duration of under four years, with sector allocations that can differ widely from the benchmark.
The firm believes traditional methods to value and manage fixed income can be fundamentally flawed. First, history shows that no one can consistently and correctly predict interest rates. Second, yield is a poor proxy for total return; third; duration is a poor proxy for risk.
Rather than rely on these uncertainties, PT Asset Management views bonds as mathematical vehicles, applying horizon-based scenario analyses to understand total return. Over a three-year horizon, the firm evaluates bonds across various interest rate scenarios, considering the total returns in rising and falling rates. In addition to interest rate scenarios, factors including optionality, convexity, credit spreads, and the yield curve shape are also varied to get a picture of the range of returns on each fixed-income instrument.
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