FIXED INCOME PORTFOLIO

Transcription

1 FIXED INCOME PORTFOLIO 1

2 IN TODAY S UNCERTAIN MARKETS, you re likely looking for a partner to meet your fixed income objectives. Let Innealta Capital work with you to cultivate your portfolio with our research-based, quantitative approach to fixed income investing. THE FIXED INCOME PORTFOLIO is an actively managed, global fixed income strategy that aims to generate above-average yield subject to strict risk considerations. The strategy invests in those fixed income sectors that we believe have favorable risk-adjusted expected performance. The strategy is operated within a quantitative framework that seeks to objectively control the portfolio-level yield, modified duration, and volatility. The process starts with the collection of daily information of constituent sectors. This enables close monitoring of the fixed income universe, as it is represented within the ETF space. This information is then incorporated into our proprietary quantitative framework to algorithmically optimize the expected return and risk ratio. INNEALTA CAPITAL Innealta Capital is a division of AFAM Capital, Inc., an SEC Registered Investment Advisor and a privately held company founded in Innealta is a quantitative asset management firm offering risk-managed, global investment solutions implemented via exchange-traded funds (ETFs). The investment process is managed by an experienced team of PhDs and CFA charterholders. Innealta s Fixed Income Portfolio utilizes an optimization methodology that aims to maximize expected return, subject to various risk constraints across a wide spectrum of fixed income sectors. 2 3

3 WHY CHOOSE INNEALTA CAPITAL? Experienced in Tactical ETF Portfolio Solutions. Innealta Capital has extensive experience managing ETF portfolios and offers a diverse selection of riskmanaged, global investment solutions implemented with ETFs. Exchange-traded funds offer several advantages including transparency, liquidity and cost efficiency. Founded in Fixed Income Management. Innealta s roots in fixed income run deep. Our founder and Co-CIO served as the Vice President of Curriculum Development for the Association for Investment Management and Research (AIMR), now known as the CFA Institute. In this position he helped develop the Fixed Income portion of all three CFA exam levels. The Fixed Income Portfolio is the cornerstone upon which all other Innealta products are constructed. Aligned with Investor Objectives. The Innealta portfolios are designed to align with investors objectives in achieving their long-term financial goals. For example, the strategy attempts to provide greater returns than a traditional fixed income portfolio in all interest rate environments. INVESTMENT MANAGEMENT TEAM Vito Sciaraffia, PhD Co-Chief Investment Officer Previous experience includes Dimensional Fund Advisors, Citigroup, and JP Morgan Former Assistant Professor of Finance at the McCombs School of Business at the University of Texas at Austin PhD, MS in Business, and MA in Mathematics from the University of California at Berkeley MBA and MFin from the University of Chile and BS in Economics from the Pontifical Catholic University of Chile Gerald Buetow, PhD, CFA Co-Chief Investment Officer Previous experience includes XTF GAM, Atlantic Asset Management, and Prudential Investments Former Vice President of Curriculum Development at the CFA Institute Former Wheat First Professor of Finance and Director of Quantitative Finance at James Madison University Authored two books on term structure modeling and interest rate contingent claim valuation Published in over 40 academic and practitioner journals Brian Henderson, PhD, CFA Senior Researcher Associate Professor of Finance at the George Washington University PhD and MS in Finance from the University of Illinois at Urbana-Champaign BS in Quantitative Finance from the James Madison University College of Business Published in the Journal of Financial Economics, Review of Financial Studies, and Journal of Fixed Income Mark Mowrey, CFA SVP, Portfolio Manager Over 15 years of experience quantitatively evaluating public equity markets using fundamental methods Former public equity research analyst, private equity financier, consultant, and entrepreneur BS in Economics from The Wharton School of the University of Pennsylvania 4 5

4 WHY ACTIVE MANAGEMENT? There are many different fixed income sectors, and their respective returns can vary materially over time. The table to the right illustrates how the returns of fixed income sector can fluctuate from year to year. We believe that an active approach to fixed income investing can mitigate risk and add value over time. 6 7

5 TACTICAL DECISIONS OVER TIME Increased U.S. Corporate allocation for more attractive yield spreads over Treasuries. Decreased portfolio duration in anticipation of a bear steepener to the term structure of interest rates. Reduced International exposure due to extended valuation and evolving risk dynamic. 100% 75% 50% 25% 0% Cash U.S. Bond Invest Grade U.S. Bond High Yield MBS U.S. Bond Go v t only Int l Bond (non U.S. dollar ) Int l Bond (U.S. dollar) From to Data on this page are derived from composites of portfolios managed directly by Innealta Capital. Holdings and performance data of those portfolios managed and/or otherwise traded by partners of Innealta Capital may differ greatly from these data. SOURCE: Innealta Capital The evolution of the ETF industry has considerably widened the fixed income opportunity set for our strategies. The Innealta Fixed Income Portfolio is a diversified, multi-sector, global portfolio offering granular fixed income exposure. The portfolio takes an active approach to yield and duration management, as illustrated by the portfolio s exposures over time in the chart above. Additionally, the portfolio is not constrained by benchmark-specific guidelines, which allows us to capitalize on favorable investment opportunities for one sector over another, while aiming to avoid areas of the market where we see greater downside risk. ETFs allow us to efficiently manage portfolio risk with rigorous precision and tactically alter exposures among sectors when it is most desirable. 8 9

6 A FLEXIBLE APPROACH REASONS TO CONSIDER INVESTING Broad Opportunity Set Flexible Disciplined Approach WHY CHOOSE THE FIXED INCOME PORTFOLIO? Access to global sectors of the fixed income ETF universe Ability to add sectors of the fixed income ETF universe with the potential for attractive risk-reward profiles Our investment approach utilizes a proprietary optimization methodology, combined with the expertise of experienced fixed income managers In today s interest rate environment, having a flexible and active approach to fixed income management can be critical to meeting clients investment objectives. The Innealta Fixed Income Portfolio is a nimble and opportunistic strategy that seeks to provide optimal risk-relative returns over longer-term investment horizons. The portfolio invests broadly across global fixed income markets and is highly unconstrained, making it unique from traditional bond portfolios that may struggle in a rising rate environment. Price Impact of a 1% Rise/Fall in Interest Rates 1 FIXED INCOME ETF UNIVERSE International Sovereign Corporate Not all bonds react identically to rising interest rates. A 1% rise or decline in interest rates impacts the value of various types of bonds in disparate magnitudes. Volatility in bond prices and yields require an active approach to generating income, growing portfolios, and preserving wealth. With the help of ETFs, Innealta s Fixed Income Portfolio navigates seamlessly between fixed income sectors based upon the underlying risk-return characteristics. Global Treasuries TIPS Agency Municipal Corporate U.S. Treasuries TIPS Agency Municipal Corporate Mortgage 1 As of SOURCE: JP Morgan Asset Management International Regional Sovereign Corporate

7 HOW TO USE THE FIXED INCOME PORTFOLIO? Providing Investment Solutions through Flexibility The Fixed Income Portfolio s unconstrained investment approach may help provide solutions to a broad range of investor needs. Innealta Fixed Income Innealta Fixed Income Portfolio Traditional / Laddered Bond Portfolio Satellite Using the Fixed Income Portfolio: Core / Stand-alone fixed income portfolio Satellite to a traditional, or laddered, bond portfolio 12 13

8 IMPORTANT NOTES The material herein has been provided by AFAM Capital, Inc. and is for informational purposes only. AFAM Capital is a Registered Investment Advisor, is editor of The Prudent Speculator newsletter and is the Investment Advisor to individually managed client accounts and certain proprietary mutual funds distributed through Northern Lights Distributors, LLC, member FINRA/SIPC. Northern Lights Distributors, LLC and AFAM Capital, Inc. are not affiliated entities. Innealta Capital is a division of AFAM Capital. Registration of an investment adviser does not imply any certain level of skill or training. The Innealta Fixed Income strategy is an actively managed portfolio of fixed income ETFs based on a classical constrained optimization approach for fixed income sectors. The portfolio aims to generate above-average yield with strict risk controls by investing in those fixed income sectors that we believe have favorable risk-adjusted performance potential and eligible ETF representation. The Fixed Income Portfolio s constrained optimization approach aims to maximize expected return subject to various risk constraints across a wide spectrum of fixed income sectors. The strategy is operated within a quantitative framework that seeks to objectively control the portfolio-level yield, modified duration and volatility. The process starts with the collection of daily information of constituent sectors. This enables the close monitoring of the fixed income universe as it is represented within the ETF space. This information is then incorporated into the quantitative framework so that we can try to algorithmically control for both risk and yield. The framework is implemented as frequently as necessary in order to help capitalize on potential investment opportunities as they arise. The frequency of the framework can be implemented daily and no less than quarterly. The benchmark for the Fixed Income Portfolio is the Barclays Capital Bond Index, which covers the U.S. dollar-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. A person cannot invest directly in an index. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Any investment is subject to risk. ETFs are subject to risks similar to those of stocks, such as market risk, and investors who have their funds invested in accordance with the portfolios may experience losses. Additionally, fixed income (bond) ETFs are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Real estate ETFs are subject to the risk that real estate stocks will decline because of adverse market conditions for the real estate industry or declines in real property values. For more information on the risks associated with an investment in ETFs, please refer to AFAM s Form ADV Part 2A

9 Contact Innealta Capital at FM 2244 Building 3, Suite 170 Austin, Texas AFAM-11/30/2015