The third option is to add an ultra-short part to your portfolio. “We haven’t had to give up much yield lately to take on ultra short in our portfolio, and yet the volatility of ultra short is quite small, which brings down your volatility.”
“The three parts together,” she said, “work to give you more from your fixed-income portfolio. Adding vehicles from the extended category will boost yield, but when counterbalanced by the core and core complement vehicles it lowers volatility and produces an attractive sharp ratio.”
She added this strategy works across all types of markets, and provides a lot of flexibility in the products used because a lot of different strategies fit into this model.
“The important thing is that every single fund used in this model is active,” said Hancock, who then offered her opinion on why active is so important in fixed income.
“The first reason is because fixed-income indexes are flawed, and a great example is the Agg," she said, referring to the Bloomberg Barclays US Aggregate Bond Index that's often used to measure the performance of the U.S. dollar-denominated investment grade bond market.
“We all use the Agg as the benchmark for our bond portfolios, but it represents only about half of the U.S. bond market” Hancock said. “If you’re managing a fixed-income portfolio, and you want an attractive core, there are a lot of opportunities outside of the Agg that will give you better results in both rising rate and falling rate environments.”
Those opportunities include international fixed income. Hancock noted the U.S. formerly held a majority stake in the global bond market but today holds just 36% of that market.
“We think there’s an opportunity to step away from indices and be active to get better alpha from your portfolio,” Hancock said. “And there’s no market where’s that’s more true than in municipal bonds.”