Fixed Income Investments
We add value to fixed income assets in two ways:
- By anticipating interest rates. When interest rates fall, bond prices rise. Conversely, when interest rates rise, bond prices fall. If we believe that interest rates are going to rise, we generally position ourselves in shorter term bonds to prevent capital losses. Alternatively, if we anticipate a drop in interest rates we will hold longer term bonds to benefit from capital appreciation.
- By finding bonds that are inefficiently priced. Similar to stocks, we look for discrepancies in the pricing of corporate bonds and preferred shares. A corporate bond may be under priced relative to other corporate bonds, yet the company in question may be generating substantially more cash flow than is required to service its debt. We add value by buying inefficiently priced bonds or preferred shares with a better risk/return profile.
We invest in Canadian and U.S. bonds, preferred shares, treasury bills and commercial paper. Fixed income investments generally provide regular income along with the potential for long-term capital appreciation.
“Experience teaches that the time to buy preferred stocks is when their price is unduly depressed by temporary adversity … in other words, they should be bought on a bargain basis or not at all.”
– Benjamin Graham