Fixed Income Investment Philosophy and Process

The MEMBERS Capital Advisors Fixed Income Team constructs its bond portfolios to achieve competitive investment returns while strictly controlling risk.  Our primary benchmark is the Merrill Lynch U.S. Domestic Master, and our focus is on investment-grade securities.  We also emphasize intermediate-term bonds with average maturities of 3–10 years.  History suggests that intermediate-term bonds have provided 90% of the total return of long-term bonds and similar portfolio diversification benefits, but with only 50% of the risk.  Many competing bond portfolios have a longer maturity structure, and should have much greater volatility when interest rates rise or fall.  We think that our conservative approach is more likely to keep investors invested, and should be just as valuable in offering portfolio diversification over the long term.

Diversification:  A Sound Investment Principle

In difficult economic or geopolitical environments, U.S. Treasury bonds tend to out-perform other types of investment-grade bonds.  When corporate profits are surging, corporate bonds generally have their day.  And, changing conditions for the real estate market and household balance sheets can lead to strong performance from U.S. Agency, mortgage-backed, or asset-backed securities.  We do not think that there is a great deal of value to be added by trying to predict which sector will out-perform, or by concentrating portfolio holdings in one area of the bond market.  Instead, we see merit in holding a diversified portfolio that owns all of these types of bonds.  A sound investment principle is that combining assets that respond differently to market events tends to have a favorable counter-balancing effect, and can actually reduce risk while improving return at the portfolio level.  Our bond portfolios are well-diversified across major segments of the bond market, and we also maintain a broad diversity of individual bond issuers.  Just as our portfolios may under-perform more aggressive, longer-duration portfolios when interest rates are plunging, they may under-perform portfolios that focus on one area of the bond market when that area is “hot.”  We choose to build our portfolios for the long haul, and expect that our performance, particularly when risk is taken into account, will be superior over longer time periods.

Valuation, Not Market-Timing

Changes in the level of interest rates have a significant effect on bond prices and the performance of bond portfolios.  When interest rates fall, bond prices go up, and vice versa.  However, it is extremely difficult to predict interest rate movements over either short or long periods of time.  We believe that our effort as managers is better spent on security and issuer selection and making modest shifts in allocations to sectors based on their relative valuation.  We unabashedly de-emphasize active interest-rate anticipation as a strategy.  From time to time, however, we will adjust the duration of the portfolios based on long-term fundamental shifts in value, market conditions, or inflation expectations.

Always Searching For Opportunities

The financial markets are often volatile, as the pendulum of market participants’ emotions swings between extremes of greed and fear.  We think that the market frequently misprices assets, and that there are usually opportunities available to those who are able to maintain a longer-term perspective.  A mildly contrarian perspective is almost always beneficial for a long-term investor.  So, we monitor yield spread relationships in the marketplace to identify sectors, industries, and securities that appear mispriced.  We then select bonds that we believe are under-valued given their underlying fundamentals and prospects.  We never abandon our basic philosophy of maintaining diversification and exposure to all major segments of the bond market, but we also believe that our bottom-up, fundamental research should allow our managers to incorporate their best ideas into our portfolios.

Risk Management

A question that we ask at each stage of the security selection process is, “Are we being compensated for the risks inherent in the security?”  An investment management team cannot obtain superior returns without undertaking risks, and we think that analyzing and managing these risks is essential.  We employ intensive in-house credit and quantitative analysis and selectively use Wall Street and third-party research to model and evaluate the possible emerging risks of each security we invest in.  We also leverage off of the resources and knowledge of MEMBERS Capital Advisors’ highly skilled Common Stock Management Team.  Finally, we use bond portfolio analytics to measure our portfolios’ risk exposures relative to their benchmarks.  We can never completely eliminate risk, but we can understand it, modify it, and limit it.

Performance Attribution

At the end of the day, good intentions are no substitute for strong actual results.  We regularly analyze the various sources of our returns versus our benchmarks to understand the impact of our investment decisions.  This enables us to explain results, confirms what we are doing well, and identifies areas where we need to improve.  This sort of objective self-analysis and self-criticism is absolutely required in the investment business because, for the most part, there are very tangible measures that tell us, and everyone else, how we are doing.  We, more than anyone else, need to know why.

A Winning Culture

We at MEMBERS Capital Advisors expect to achieve superior results across all our investment portfolios and funds.  We know we can’t be all things to all people, but what we do we insist on doing well. 

We work in a collegial and collaborative environment where mutual respect and open sharing of ideas are important elements of our success.  Dedication, diligence, and hard work are necessary to meet our clients’ high expectations and reach our own high standards.  We embrace change, continuously challenging the status quo and the conventional wisdom.  We do not have “star managers,” but rather are organized as a team, with each individual being accountable for and taking ownership of his or her investment responsibilities.  We believe that this leverages everyone’s individual strengths and results in a stronger whole.

Finally, we adhere to the highest ethical and professional standards.  We are always cognizant of the fact that we are managing other people’s money.  Our investors and clients are counting on us, and we aspire to exceed their expectations, now and in the future.