Short/Intermediate Term Fixed Income Assets are defined as securities where the payout of principal and interest are promised to the purchaser by the issuer in advance. The initial maturity of Short/Intermediate Term Fixed Income Assets is generally up to 5 years.

The purpose of holding fixed income securities is to increase portfolio stability. We focus on Short/Intermediate Term Fixed Income in order to optimize returns while maintaining overall portfolio balance. While other fixed income investments might provide higher returns, they do so only by assuming additional risk in the form of price volatility2, which undermines this stability. Research has shown that for investors seeking fixed income as a source of portfolio stability, the risk return trade-off generally becomes unattractive for securities with maturities that extend beyond five years. This trade-off is depicted below:

Evaluating the Maturity Risk/Return Tradeoff
Quarterly: 1964-2010

We can see that by extending the maturity out past five years, we are taking on much more risk (red line = standard deviation) but are compensated with only slightly better returns (green line = returns). By focusing on the shorter end of the spectrum, we are both maximizing return for unit risk taken for the fixed income asset class, while also providing important diversification benefits to the overall portfolio.

Our passive approach makes no attempt to predict interest rate changes that occur in this five-year “short end” of the yield curve. We instead adopt either “laddered” strategy, designed to provide equally-weighted dollar exposure to the yield curve, or a variable maturity approach, which is designed to capture the maximum return for any changes in the yield curve that might occur.

We also carefully control credit risk (the risk that an issuing entity will default on its obligations). We restrict our recommendations to investment vehicles that invest in bonds issued by governments (sovereign debt), government agencies, municipalities, or corporations with investment grade credit ratings.