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Portfolio Update 

As stated in previous posts, we have been monitoring the bond market and the effect rising interest rates and inflation have on the fixed income allocation in your account.  For fixed income , our number one objective is to use best-in-class bond mutual funds to help manage the risk in  the fixed income positions.  As there has been conflicting economic data within last several months, we have been looking to shorten our duration within the fixed income portfolio.  Though we may be in the final stages of this cycle, we are not quite ready to call the turn in this 30-year bond bull market.

To this point, we decided to swap our PIMCO Mortgage Opportunities fund (PMZAX) holding with Semper MBS Total Return fund (SEMMX), to potentially improve performance and shorten our duration.  We arrived at this decision after extensive research into various scenarios and performing due diligence into the management teams and portfolio managers at several funds.

Semper Capital Management stood head and shoulders above its peer group with their quantitative analysis process. This approach analyzes MBS (Mortgage Backed Securities) at the loan level to determine each underlying loan’s projected cash flows and borrower’s credit worthiness.  At present, SEMMX has holds 376 MBS bonds which represents 85,000 individual loans.[i] 

Semper’s MBS Total Return fund has been in existence just shy of five years, although the owners and managers have been in business managing institutional clients for over 20 years.[ii]  Their performance during the 2008-2009 housing bubble was exceptional.  Not only did their mortgage back security investments not lose money, they performed positively in both 2008 and 2009.  We are making this move now for four reasons.  First, as stated above we shorten our duration within this asset class from 2.36[iii] years to 1.12 years[iv].  Second, in July SEMMX reached its five-year anniversary and they will begin showing up on institutional investors radar and reach their $2 billion target for the fund and be shut down to new investors.[v]  Third, this bond mutual fund is one of the best in its peer group of other MBS bond funds.

Finally, we believe this rising rate environment may continue.  SEMMX’s internal floating rate bond holdings (85% of the portfolio)[vi] with its zero and negative duration characteristics will increase in value even as rates increase and prepayment speeds slow.  Projected cashflow timelines for floating rates magnify the value of rising coupons and potentially increases the total return of our holdings within SEMMX.

You will begin to see these changes in your account over the next few days. You will be receiving a prospectus in the coming days. We welcome your questions regarding this change along with any question you may have regarding any of the portfolio’s we manage on your behalf.

Have a great week.





[iii]              Morningstar Information as of June 30-2018




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