THE CORE CONUNDRUM - Guggenheim Partners

Barbell means to structure a portfolio with both short- and long-duration
securities in order to achieve a desired duration target. With a barbell strategy,
the negative impact of rising rates on the longer-duration, fixed-rate assets
is partially offset by the positive benefit of higher interest coupons on floatingrate
securities.
a portfolio with both short- and long-duration
securities in order to achieve a desired duration
target.) Utilizing this approach provides investors
with yield advantages while still meeting portfolio
duration objectives. With a barbell strategy, the
negative impact of rising rates on the longerduration,
fixed-rate assets is partially offset by
the positive benefit of higher interest coupons
on floating-rate CLOs. In the case of ABS, shorter
maturities and principal amortizations allow
investors to reinvest proceeds at higher yields
if rates were to rise over an extended period.
To complement the short duration of ABS in the
barbell strategy, we prefer select, longer-dated,
taxable municipal bonds that offer yield premium
to Treasuries and agency debt. The political
uncertainty over the past several years, namely
the debt ceiling debate and the Fiscal Cliff, has
created attractive valuations in the municipal
market. As investors begin focusing on the real
economy and not the political economy, we believe
municipals are primed to benefit. According to
the Rockefeller Institute, state tax revenues have
grown for 10 consecutive quarters as employment
at the state and local government level has stabilized.
California, once the poster child for fiscal ineptitude,
is projecting an $850 million budget surplus for
full year 2014. A longer-term tailwind for municipal
credit fundamentals will be the continued
momentum of the housing sector. Home price
appreciation will eventually translate into higher
property tax assessments realized by local governments
over the next several years.
Aside from these improving fundamental factors,
the municipal sector may also benefit from technical
catalysts. Building upon the record $50 billion in
mutual fund inflows in 2012, continued demand
for municipals will likely be aided by the expected
growth of the U.S. economy throughout 2013.
Increased Federal revenues may lead to a decline
in Treasury bond issuance, forcing investors into
other government-related alternatives such as
municipals and military housing. Our focus remains
on A-rated revenue bonds maturing within 20 years
that finance essential services, public universities
and transportation.
Active Management in Practice
With nominal coupons across the fixed-income
universe near historical lows, the opportunity cost
from employing a benchmark-driven, passively
managed strategy has increased dramatically. An
actively managed strategy provides the opportunity
to generate returns through targeted weightings
to attractively valued sectors. The volatility of sector
performance over the past few years, quantified
in the following table, underscores the importance
of active management.
13 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS