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5 Characteristics to Keep in Mind When Seeking Income

An increasing number of bond buyers rely on their fixed income portfolios primarily for generating a consistent stream of high and reliable income. For these investors, the goal is to maximize annual cash flows while preserving capital, with price appreciation being a secondary concern. One of the frequent topics we are hearing lately is how to go about constructing a solution to meet specific income needs. Here are five characteristics we recommend keeping in mind when searching for a solution.

  1. Consistency
    Income investors value attractive, steady cash flows to fund their income needs through interest rate cycles and the associated market price swings. The predictable payments of corporate bonds, for example, can help ensure that cash flows remain consistent over the long term, while still offering a compelling yield. Most corporate bonds offer fixed interest payments for the life of the bond, with interest rate and payment frequency at set intervals so investors always know when and how much to expect.

  2. Quality
    In the low rate environment we have experienced for the past several years, it can be easy for income investors to “reach for yield”, and end up exposed to excessive risks. Once rates begin to rise, these securities may perform poorly.

    Corporations and industries with higher levels of risk often issue higher yielding bonds to entice investors. These high yield bonds typically have a higher risk of default though, and potential disruptions in coupon payments, such as through defaults, can interrupt cash flows. For this reason, credit quality is an important consideration. Investment grade securities, for example, can help mitigate unnecessary risks while still maintaining a relatively high and reliable stream of income.

  3. Duration Management
    In general, investors moving further out on the maturity curve are able to capture higher yields by accepting greater interest rate risk. Yet with their greater sensitivity to changes in interest rates, bonds with longer durations will have steeper price declines when rates inevitably rise. Given the anemic yields currently available on short-term bonds, we believe an intermediate-term focus may make the most sense right now. Overall, an income solution with the ability to actively manage duration exposure could be beneficial in today’s uncertain interest rate environment.

  4. Flexibility
    When addressing the challenges of generating income today, it makes sense to search for a wider set of opportunities. In this regard, flexibility could include the ability to invest in different income-oriented asset classes (such as preferred securities) without adhering to the constraints of a benchmark. An actively managed, flexible strategy may present opportunities to maximize potential cash flows across market environments.

  5. Diversification
    Well diversified portfolios can enable investors to generate income regardless of interest rate or market events. Diversification across industries, maturities, issuers, and even various segments of the fixed income market can provide a greater degree of risk management and insulate cash flows from potential volatility.

At Roosevelt Investments, we believe these characteristics are critical to consider when evaluating potential income solutions. With these tenets in mind, we designed the Roosevelt Current Income Portfolio for the conservative income investor seeking a consistent steam of enhanced cash flow from an investment grade portfolio.

This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.

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The Roosevelt Investment Group, Inc. is an independent investment management firm that is not affiliated with any parent organization. The Roosevelt Investment Group, Inc. manages domestic equity, international equity, domestic fixed income, global fixed income, and balanced assets for primarily U.S. clients. The Roosevelt Investment Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission and notice filed in all 50 states.

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