INCOME

The objective of the Income Strategy is to create the safest balance between risk and reward using stocks and bonds.  It is specifically designed for maximum safety and current income. Bonds represent 45% to 80% of total assets at all times.  To avoid interest rate risk, all maturities are less than ten years, with an average maturity less than five years.  To avoid credit risk, all bonds will be investment grade, with an average rating of AA/A.

Tactics

Bonds:  During periods with a steep yield curve, bond maturities are spread between two and eight years.  “Riding the Yield Curve” will play a key role in that environment.  As the yield curve flattens, bonds will be held to maturity, laddering them from zero to six or eight years.  If the yield curve is inverted, maturing bonds will be rolled into short-term paper.

Equities:  Stocks comprise a highly diversified, heavily income-oriented portfolio.  Low turnover will seek to exploit relative values within the stock’s trading range.  Industrial stocks with high yields may be bought for capital gains.  The weighted beta of the stocks will be lower than the S&P 500, enabling a higher weighting in stocks versus bonds while still remaining in the lowest area on the risk spectrum.

Strategy

Asset allocation is designed to exploit directions in interest rates as well as accelerations and decelerations in the economy.  Allocation should place the portfolio on the lowest portion, in terms of risk, on the Ibbotson thirty-year study, comparing stock and bond weightings.  The net result should be high income, modest growth in income and low variations in total return.