Thornburg Investment Management first quarter letter to investors.
Thornburg Investment Management: Low Duration Municipal Fund
Laddering – an All Weather Strategy
The newest addition to Thornburg Investment Management’s municipal fund line-up is Thornburg Low Duration Municipal Fund. The Fund pursues its primary goal by investing principally in a laddered maturity portfolio of municipal obligations issued by states and state agencies, local governments and their agencies and by certain United States territories and possessions. Thornburg Investment Management actively manages the Fund’s portfolio.
In our opinion, current market conditions have created an ideal situation in which to launch this strategy. Because the magnitude of changes in value of interest-bearing obligations is greater for obligations with longer durations, given an equivalent change in interest rates, the Fund seeks to reduce changes in its share value compared to longer duration fixed income portfolios by maintaining a portfolio of investments with a dollar-weighted average duration of normally no more than three years. The Fund also attempts to reduce changes in its share value through credit analysis, selection, and diversification.
At Thornburg Investment Management, our approach to management of the Fund is based on the premise that investors in the Fund seek preservation of capital along with an attractive, relatively stable yield. While aggressive bond strategies may generate stronger returns when the market is turning a blind eye towards risk, they often fail to stack up over longer periods of time.
We apply these techniques to manage risk and pursue attractive returns:
- Building a laddered portfolio. Laddering has been shown over time to mitigate reinvestment and interest rate risk.
- Conducting in-depth fundamental research on each issue and actively monitoring positions for subsequent credit events.
- Diversifying among a large number of generally high-quality bonds.
- Investing on a cash-only basis without using leverage.
Thornburg Investment Management’s Suite Of Municipal Funds
Municipal Funds for a Range of Interest-Rate Scenarios
At Thornburg Investment Management, we often say that predicting interest rates is a fool’s game. And with the Federal Reserve still heavily involved in the markets, it’s even more difficult to forecast how rates may rise than when they may rise. Will long rates rise first and short rates follow? Will long and short rates climb simultaneously?
A traditional strategy to protect oneself against interest-rate risk is to move into shorter-duration bond strategies. But the seemingly counterintuitive response of moving to longer-duration strategies can sometimes yield better results.
Diversify Across the Yield Curve
This uncertainty points to why it’s important for investors to match their investment horizon to the duration of the strategy in which they’re invested, and to diversify assets across the yield curve.
For any interest-rate scenario, Thornburg’s comprehensive suite of municipal funds gives prudent investors the ability to diversify across the yield curve.
Diversify Across the Yield Curve with Thornburg Municipal Funds
AAA General Obligation Municipal Yield Curve, as of April 2, 2014
See full Thornburg Investment Management Q1 Letter To Investors via SEC