The Challenge
A Controlled Foreign Corporation’s (CFC) investment policy statement (IPS) mandated a conservative, risk-managed approach centered around fixed income investing. This posed a significant challenge in the wake of the Federal Reserve’s intervention during the COVID-19 pandemic, which drove interest rates to historically low levels. While this environment initially provided stability, it introduced significant long-term risks—especially for portfolios relying on traditional fixed income strategies.
Broad investment grade indices at the time carried longer average durations, often spanning several years. This made them acutely sensitive to any increase in interest rates. For a portfolio bound by IPS constraints and heavily weighted in long-duration instruments, the rising rate environment created a ticking clock of potential devaluation. Staying compliant with investment grade requirements while avoiding the pitfalls of interest rate volatility required a strategic rethink.
The CFC needed an investment manager who could operate within these rigid policy parameters while minimizing risk and preserving portfolio performance as interest rates rose.
The Plan
In response, WMK Investment Partners, serving as the investment manager, undertook a comprehensive restructuring of the portfolio. The goal was clear: reduce interest rate sensitivity while simultaneously enhancing yield and maintaining compliance with the IPS-mandated focus on investment grade securities.
WMK Investment Partners’ approach started with a reassessment of portfolio duration. Recognizing that investment grade indices left the portfolio exposed, they introduced targeted changes designed to minimize exposure to rate increases. This included incorporating investment grade bond ETFs equipped with interest rate hedges, which helped shield the portfolio from the direct impact of rising rates.
In addition, floating rate treasuries were strategically employed in place of more traditional long-duration instruments. This not only helped align the portfolio with a more favorable interest rate posture, but also preserved the credit quality standards required under the IPS.
The result of these changes was a portfolio with a significantly shortened average hold duration. This allowed for a more nimble, responsive structure that could better withstand rate hikes. Despite this shift, the new portfolio construction still maintained a competitive yield—significantly above traditional benchmarks—demonstrating that lower risk did not have to mean lower reward.
The Result
The outcome was a testament to the value of responsive, forward-thinking portfolio management. As interest rates began to rise, the newly structured fixed income portfolio proved its resilience. Thanks to its reduced duration and adaptive composition, it was able to avoid the loses and opportunity costs experienced by many traditional fixed income portfolios that were more heavily exposed to assets with longer durations.
Under WMK’s guidance, the IPS-restricted portfolio not only preserved capital but delivered positive returns during a period when many comparable benchmarks experienced lower returns. This performance underscored the effectiveness of combining fixed income investing discipline with innovative, flexible strategy.
More importantly, the strategy demonstrated that IPS compliance and performance are not mutually exclusive. With the right investment manager, it’s possible to navigate turbulent market environments and continue to drive value, even within the bounds of strict regulatory and credit quality constraints.
These are stories of actual clients of WMK Investment Partners. Note there was no compensation paid to clients and these comments and experiences may not be representative of any other person’s experience with the firm.