Working to Serve You Better
I don’t know about you, but I’d like to put 2022 firmly in the rear-view mirror. The war in Ukraine, inflation, the Federal Reserve’s interest rate increases, bear markets in both stocks and bonds, and the meltdown in the cryptocurrency markets have made 2022 a miserable year for investors.
However, this doesn’t mean we haven’t been working to make Provident a better firm to serve your needs, especially now that interest rates have risen above zero. In the investment community there has been an acronym, “TINA”, to describe the low interest rate environment over last decade – “There Is No Alternative” to stocks.
But that isn’t true anymore. The Fed’s interest rate increases have moved bond yields up significantly. At the end of 2021, the 10-year Treasury yield was 1.52%. In October it peaked at 4.25% and has since fallen to roughly 3.65%, still quite an increase. With inflation in the upper single digits this might not seem all that great a return but, depending on your individual financial situation, it may finally make sense to add or increase the allocation to bonds in your portfolio.
Our bond strategy is to “ladder” maturities of high-quality taxable or tax-exempt securities. Laddered bond portfolios consist of bonds with maturities spread across a desired range of typically no more than ten years. Laddering reduces the risk that bonds might all mature at a time when there are few desirable investment opportunities.
To achieve high-quality, we tend to focus on municipal bonds, often called “munis”, with their combination of minimal default risk and higher after-tax yields as many munis bonds pay interest exempt from federal tax. According to Moody’s, over the past fifty years investment grade rated munis bonds experienced a 0.10% default rate after ten years versus 2.24% for global corporate bonds. In addition, bonds originated by municipalities within the state you reside also receive a state income tax exemption. For clients living in high income tax states the combined federal and state tax exemption can significantly boost after-tax returns. For accounts not subject to tax, like IRAs, we invest in “taxable” munis. Interest on “taxable” munis is subject to tax if held in a taxable account, which IRAs are not. Their yield is higher than tax-exempt munis, but both have ultra-low default risk.
For clients who aren’t interested in relatively low bond yields but desire current income and the opportunity for modest share price growth at lower risk we have introduced the Dividend Total Return (DTR) portfolio. We view DTR as a “middle ground” between our growth stock portfolio and bonds. Long-term returns probably won’t be as robust as our growth stocks, but should be higher than bonds, while volatility should be between bonds and our growth stocks. A summary of the DTR strategy is available here.
We have researched companies meeting the DTR profile for many years and occasionally included them in client portfolios. As our clients age, we frequently have been asked if there are strategies to pursue good returns while tamping down risk. We’ve been working to refine this approach over the past couple years and recently began investing in DTR stocks for clients. Let us know if you’d like to discuss incorporating this approach in your portfolio.
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Since our founding in 1981 we have grown to over 350 clients while maintaining our minimum investment at $350,000. We have resisted raising our minimum, particularly because we like helping our clients’ children as they begin their long investment journey. However, costs to service clients have steadily increased over the years and we find it necessary to raise our minimum to $500,000. For any existing clients below this new minimum, we expect to continue as your investment manager. Rest assured you will receive the same high level of service we strive to provide. Further, if a family member would like to join us but is below the new minimum, we are more than happy to discuss their circumstances and make exceptions as appropriate, as we have in the past.
In good markets and bad we strive to get better and, as always, we thank you for being a client.
Dan Boyle, CFA