Putting Performance in Perspective

By Markets Covestor

At the end of the first quarter, the Stable High Yield (SHY) portfolio showed a 5.2% loss over the past 12 months. The Barclay’s U.S. Aggregate Bond Index (AGG) was down 0.1% over the same period. In my opinion, this comparative performance must be put in perspective.

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A one-year time frame, while popular and conventional, is as arbitrary as any. I believe the 5.2% one-year loss for SHY was partially occasioned by something good — its substantial outperformance during the first five months of 2013, a period in which it rose by about 30%.

The AGG rose by approximately 10% during that period. Both have declined since that time, but SHY has fallen from a much higher height while still posting the better performance record since January 2013 and since its inception (4.9% vs. 3.2%) in July 2011.

The greater decline in the value of SHY since it began falling in the second quarter of 2013 was caused by a more precipitous drop in the shares of mortgage real estate investment trusts (mREITs) than in the overall bond market.

With the persistence of rock-bottom interest rates and renewed uncertainty over Fed strategy, the portfolio is maintaining an “aggressively defensive” posture. We hold fixed-income securities that I believe feature minimal interest-rate risk, though with some credit risk with which we are comfortable.

We have been anticipating a rise in rates for many months –– and may continue to wait a considerable time longer. But because it could occur at any time in my opinion, the present position of this portfolio is a defensive one.

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DISCLAIMER: The investments discussed are held in client accounts as of March 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.