February 24, 2017 in Five, Five, Five | by Dhruv Maniktala

Interest Rates, Global Diversification, Liquidity Management, and MLPs

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US Treasury Marketable Debt

While much of the talk after President Trump’s election victory has been around the positive impact on the U.S. economy his pro-business and infrastructure spending plans will have, something not being discussed is the negative impact rising interest rates could have on our nation’s ability to service its bloated balance sheet. As the above chart shows, an overwhelming majority of the debt matures within the next 5 years and will have to be refinanced. If the current trend of rising rates continues, it could significantly affect our country’s debt service.


We want to emphasize the importance of client Investment Policy Statements (IPS) in managing a client portfolio. The IPS clearly communicates the unique goals of your portfolio, from both a risk and return perspective, as well as identifies asset allocation, any additional objectives, and specific circumstances you may have. It is an additional step to further ensure integrity and transparency throughout our portfolio management process. If you have not yet received an IPS, your Wealth Manager will have one ready for you in your next portfolio review meeting.


Domestic vs. International Equities

A globally diversified portfolio enables investors to capitalize when various regions and styles are in favor. We believe that international markets are poised to outperform going forward based on their cheaper valuation and recent cyclical underperformance relative to US markets. As we started to derisk growth allocations last year, our goal was to leave international exposure fairly constant given these relatively attractive valuations.


In 2016, our Investment Policy Committee approved a new liquidity management strategy for clients to serve as an alternative to the 0% yields on most money market funds. As of 12/31/16, the current yield on the portfolio was around 2.0% net of all fees. It is not a cash strategy, and there will be some fluctuation in price, but we feel it can provide an attractive alternative to other cash alternatives over an appropriate holding period.


Master Limited Partnerships (MLPs) had a strong performance year in 2016 with the Alerian MLP index up close to 20%. Because of tax regulations, MLPs are almost exclusively oil and gas investments that pass-through, or distribute, the income generated from underlying assets to the investors of the MLP. Investors can use this yield level to help inform valuation and investment decisions. Although our expectations going forward are more muted, we still see opportunity for growth in MLPs as the yield spreads on MLPs imply they continue to be underpriced relative to other yield-generating assets.

Filed Under: Five, Five, Five

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