WCB’s investment philosophy is based on the fact that the long-term returns of fixed income portfolios are primarily a function of income with over 95% of the cumulative total return for the indices coming from interest and compounding. Hence, the foundation of our approach is an ongoing effort to maximize income within the credit and maturity guidelines for each client. This is achieved by identifying and taking advantage of various trends affecting fixed income securities, occasional inefficiencies in the markets, and by continuously assessing the relative value of the major sectors of the bond market.
The firm employs a disciplined decision-making process to tactically position portfolios relative to the yield curve and to overweight selected market sectors such as corporate bonds, mortgage backed securities, assets backed notes, and, if directed by clients, it may also allocate a small percentage of a portfolio to other fixed income instruments such as private placements (144a), high yield debt, and Treasury Inflation-Protected Securities (“TIPS”).
WCB’s approach calls for making many small divergences relative to the benchmark (within portfolio constraints) in order to enhance performance. The strategy by which we decide these divergences is called the Three-Step Process. First is yield enhancement through sector allocation, adding value by opportunistically overweighting corporates and / or mortgages. Second is individual security selection, credit analysis and yield curve positioning utilizing proprietary quantitative and qualitative security analysis of corporate and mortgage backed securities and the structure of the yield curve. The third "step" incorporates duration/maturity risk management accomplished through minor duration adjustments relative to the selected benchmark, generally +/-15%, while adhering to the client’s specific security, sector, quality and duration requirements.
WCB employs a large variety of tactics within this overall strategy given economic factors and fixed income market conditions, each one adding value to some extent. Portfolios are diversified among market sectors with an emphasis on those that offer high yields as well as high quality. WCB believes that sector rotation can add value and that overweighting yield-enhancing securities also produces superior returns. In normal markets, the firm will systematically overweight corporate bonds and tactically overweight/underweight mortgages relative to the client’s benchmark index. Over time, WCB has found that corporate bonds provide excess returns (in most market environments) to a portfolio over a wide range of interest rate scenarios. Mortgage securities provide excess returns that are much more cyclical.
The “risk-controlled” nature of WCB’s investment philosophy is one of its greatest strengths. WCB’s philosophy is one of taking numerous, measured, active “bets” relative to the benchmarks, with each “bet” being relatively small. Generally speaking, at any given time WCB is more right than wrong among these decisions, leading to modest positive relative performance in the short run, and, because of the high degree of consistency, moderate to substantial out-performance in the long run.