For investors who seek greater emphasis on income, fixed income products can be the cornerstone of an investment portfolio. Bonds and other fixed income products can also help provide a dependable income stream.
Typically, fixed income products represent loans to corporations or government entities. While offering limited opportunity for capital appreciation, they can add steady income and diversification to investor portfolios.
The fixed income markets are vast and varied. Many investors are unaware that the universe of fixed income products is significantly larger and more diverse than that of equities. Capably navigating this universe requires familiarity with its many nuances and complexities.
With extensive knowledge and experience in the enormous fixed income arena, E.K. Riley’s Capital Market Group (CMG) delivers superior integration of trading and portfolio management services to our fixed income customers.
E.K. Riley advisors are never limited to buying product off a screen. We provide personalized assistance and best execution service from our own fixed income trading department. To help investors sort through the complexities of the fixed income markets, we employ a core of experts trading in the various markets who analyze and report on the subtleties of each sector, including agencies, corporates, mortgages, municipals and convertibles. In some categories, we employ multiple specialists.
We separately retain experienced professional portfolio managers in both taxable and tax exempt products. The combined efforts of these two distinct layers of knowledge trading specialists and portfolio management experts allow E.K. Riley advisors and their clients to construct fixed income portfolios tailored to their individual goals and requirements.
Wells Fargo Resources
In addition to the services provided by our internal staff, E.K. Riley advisors have access to the vast execution resources of Wells Fargo. Through electronic trading systems, we have access to billions of dollars of inventory.
Government, Agency And Mortgage-Backed Securities
Government Securities are guaranteed by the full faith and credit of the U.S. Treasury and income is exempt from state and local income taxes. There are numerous variations, the most common of which are: • Treasury Bills, with durations of one year or less, issued at discount and repaid at face value at maturity. • Treasury Notes, with durations between one and ten years, that yield a consistent income stream paid semiannually. • Treasury Bonds, long-term securities that pay interest like Treasury Notes. • Zero Coupon Government Bonds, long-term securities with all interest paid in a lump at maturity. • Savings Bonds, sold at a discount from face value, paid at maturity. • Treasury Inflation Protected Securities, issued in varying durations, with principal adjusting up or down in response to changes in the Consumer Price Index. Interest is paid semiannually.
Agency Securities are fixed-income securities issued by Ginnie Mae, Freddie Mac, Fannie Mae and government sponsored entities (GSEs) other than the U.S. Treasury.
While not guaranteed, as are U.S. Treasuries, the government’s sponsorship of these securities makes them a creditworthy fixed-income investment alternative. GSEs generally deliver yields higher than Treasuries or CDs.
Mortgage Securities, issued by Ginnie Mae, Fannie Mae and Freddie Mac, are pooled ownership interests in real estate loans made by banks and mortgage issuers. Investors are paid interest and principal as borrowers pay off their mortgage loans.
For investors interested in reducing their federal income tax burden, municipal bonds can be a practical solution. Supporting vital infrastructure needs of states, municipalities and counties, “munis” are debt securities paying interest income that may be exempt from federal income tax. In addition, for investors within the state of issue, income is typically exempt from state and local income taxes as well. The tax advantage is offset by municipal’s lower interest rates but can result in a higher yield for investors in higher tax brackets.
Certificates Of Deposit
Many investors, particularly those in or near retirement, need a reliable stream of income as well as investment principal protection. FDIC-insured Certificates of Deposit (CDs) are one of the few investment products that can provide those assurances. CDs are also a great tool to help diversify investment portfolios.
CDs are insured time deposit investments offered by banks and other institutions in durations of a few months up to five years or longer. A fixed rate of interest is paid, usually in regular intervals and there are restrictions on the withdrawal of funds during that period.
For those who would like to invest in U.S. companies with whom they are familiar, but who prefer a more consistent and dependable income than they might receive from the equities of those firms, corporate bonds can be an attractive alternative.
Companies issue corporate bonds to raise operating capital. Because bondholders have priority over shareholders in the event of liquidation, a corporation’s bonds are considered a less risky investment than its equities. The most significant risk is that of interest rate fluctuations diminishing the effective yield.
To help our investors better understand the corporate debt market, E.K. Riley offers access to agencies such as Standard & Poors and Moody’s, who issue ratings which reflect their opinion of the credit worthiness of individual corporate debt securities. The ratings range from the highest quality with the least amount of credit risk to weaker issues with commensurately higher risk. Agency reclassifications, either up or down, can have a significant impact on bond prices. While agency ratings can be helpful in ascertaining credit quality, they should be used in conjunction with independent analysis.
In an effort to further protect our clients, E.K. Riley maintains a close working relationship with Egan Jones, an independent ratings agency. This option provides supplementary third-party information that may offer additional guidance as to the credit worthiness of specific issuers. Preferred Stock
Preferred stock, a hybrid between common stock and a bond, is a financial vehicle combining both equity and debt characteristics. Typically, investors are paid a guaranteed dividend ahead of any similar payments to other shareholders, and have a claim on assets or earnings that supersedes common stock holders in the event of bankruptcy. Balancing the advantages of higher income and seniority is the loss of voting rights and the opportunity for significant capital gains.
Convertible bonds are hybrid securities that meld the attributes of both stocks and bonds. Convertibles are issued as corporate bonds with the option for bondholders to convert their bonds into shares of common stock. The conversion feature attached to convertibles can be complicated and each security is slightly different in terms of how the option can be exercised.
To help our investors sort through the complexities of the convertible bond market, E.K. Riley provides research via access to the Value Line Convertible Survey Online.
E.K. Riley Strategies
E.K. Riley bond trading and portfolio specialists help advisors, their clients and businesses effectively manage their fixed income portfolios. They deliver expertise in the form of investment and cash management strategies for individual investors, money managers, corporations, banks, insurance companies and other business entities.
Our advisors are linked to specialists in a host of fixed income portfolio strategies, including swaps and laddering.
Bond swaps, which involve the selling of one bond issue in order to buy another, allow investors to take advantage of differences in interest rates, duration or improvements in income or quality. An underperforming issue can be swapped for another if the advisor and client decide the latter has better prospects or offers a higher yield. Duration swaps can help accommodate changes in investor objectives or interest rate outlooks. Swaps can also support the desire to upgrade portfolio credit quality.
Bond swaps can also generate a tax benefit if the bond being sold was acquired when interest rates were lower and bond prices higher, and the bond being acquired is during a market when higher interest rates and lower bond prices results in tax deductible capital loss.
Bond Laddering is a fixed-income portfolio diversification strategy where bonds with staggered maturity dates are purchased to help decrease overall interest-rate risk by spreading the risk out along the interest rate curve. In a rising interest rate environment, funds from maturing bonds are reinvested in higher yielding issues. While the maturity date diversification can inhibit portfolio growth, the potential for enhanced protection of both principal and income may be preferable objectives, particularly for retirement portfolios.
Through our fixed income resources, our advisors also offer specialized products and services for employee benefits and 401k planning and implementation, as well as business succession planning.
From the descriptions above, it should be apparent that fixed income investments occupy an almost immeasurable space in the financial world. Frankly, it’s no place for dilettantes or dabblers. For busy investors, finding the time to gain a thorough understanding of the various product offerings and their investment applications can be impossible, if not intimidating. But size and diversity are desirable attributes when they help investors meet specific portfolio needs with targeted products. The key is to have a knowledgeable, experienced financial partner sitting next to you, helping you make informed choices.
E.K. Riley has assembled an impressive group of fixed income experts with both the technical skills and the hands-on experience to sort through the product labyrinth. They help our advisors help their clients find clarity and understanding. Our goal is to simplify an otherwise complex process so you can make informed, confident fixed income decisions.
In addition to the professional people and skills mentioned above, E.K. Riley maintains a library of detailed educational materials, available to our clients who enjoy learning as much as they can about fixed income investment products and strategy. Just ask.