What’s in the News…
Callan Institute recently published research focusing on how institutional investors can achieve a 7.5% return while minimizing risk. Using an optimizing tool to find this efficient frontier, with the asset mix based on forward-looking capital market projections (which Callan created), the research yielded some interesting results.
Callan’s research found that the most efficient way to realize a 7.5% return were the following allocations for the three calendar years examined:
- 1995: 100% broad U.S. fixed income, with a standard deviation of 6%.
- 2005: 48% in what Callan called “relatively risky, return-seeking assets” and 52% in fixed income. That 7.5% return had a standard deviation of 8.9%.
- 2015: 88% in “return-seeking assets,” and only 12% in fixed income. That period’s return had a 17.2% standard deviation.
In 2015, the standard deviation was almost double that of the 2005 deviation and nearly triple that of the 1995 time frame.
Source: Callan Capital Market Projections, Callan Risky Business
What are we thinking?
The dramatic decline in the asset allocation in fixed income, from 100% to 12%, is what the Callan Institute found surprising.
As Callan hypothesized, to reach a return of 7.5% in today’s market requires investors to take more risk. But taking more risk may not be suitable for all investors. However, in an environment with declining interest rates and falling bond yields or increasing interest rates and rising yields, investors would have to take on more risk for return. So what is an investor to do?
At Roosevelt, we manage fixed income as a solution for cash flow and not for total return. As income investors we appreciate that total return includes interest, capital gains, dividends and distributions that are realized over a certain time period. Instead of reaching for that 7.5% return in today’s market place we strive for reducing risk and providing investors with a sustainable and substantial income stream.
If you are considering fixed income in an asset allocation with today’s market uncertainties, know that our Current Income Portfolio is structured to benefit from a rising rate environment while also providing income investors with high income in low rate environments. So, in an environment of expected interest rate hikes, why not try to maximize income instead of incorporating more risk into your portfolio.
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