April Newsletter to Clients

Enjoy this month’s edition that features a review of the 1^st quarter’s stock market performance, a close look at a bond mutual fund held by many of our clients, and a summary of a recent Schwab survey of investors.

The S&P 500 index of large, U.S. companies was down 13% at one point this year but ended the quarter down just 4.6%, including dividends. Small U.S. companies finished even lower with a 7.5% decline. There has been a lot of information for markets to process so far this year: a war, inflation, interest rate increases, actors slapping comedians at the Oscars, etc. Overall, the U.S. economy is currently quite strong by almost all measures but investors in the stock market look toward companies’ future earnings and the factors above are clouding their crystal balls. As a result, we’ve seen a lot of volatility so far this year.

As you know, we use income investments such as bond mutual funds to help diversify portfolios because they often help provide stability when other investments decline in value. The bond index that gets tracked most often is called the Bloomberg Aggregate Bond Index and it declined almost 6% through the first quarter. That’s the worst 3-month performance since 1980, according to Sebastien Page of T. Rowe Price. Joe Davis, chief economist for Vanguard said, “…over the long run, if you hold stocks and bonds, diversification works. Rising bond yields (interest rates) mean that you will be receiving more income from your bond funds…and that’s a good thing.”

When we choose bond mutual funds, we tend to look at two primary factors: 1) The credit quality of the bonds held by the fund; and 2) The duration of the bonds held. So, let’s examine the Lord Abbett Short Duration Income Fund (LALDX and LLDYX) that is one of the bond funds held by most clients to see how the fund stacks up.

First, almost 77% of the bonds the fund holds are considered investment-grade bonds so the credit quality is quite good. That means the likelihood the issuer of the bonds defaults is quite low. Second, the duration of this fund is just 1.92 years. Duration is a measure that combines the maturities of the bonds (how long until the issuer repays the bond) with the amount of interest they pay on those bonds. The lower the measure of duration, the less the bond’s price will fluctuate when interest rates rise or fall.

As a result, our Lord Abbett fund declined just 2.49% during the first quarter – as opposed to a decline of 6% for the Aggregate Bond Index. In other words, while it certainly can’t be described as a good quarter, this fund performed how it was designed to and helped protect our portfolios during difficult circumstances.

A recent Schwab Advisor Services study showed that more than 75% of high-net-worth investors surveyed said that working with investment advisors who make decisions that are “in their best interest at all times” is crucial. This same research shows that the independent Registered Investment Advisor model – what Moneywatch Advisors is – aligns with what clients expect:

• Customized guidance based on their entire financial picture;
• An advisor who is responsive, attentive, and personal;
• A fee structure that’s simple and transparent;
• An advisor who makes decisions that are in the best interest of clients at all times.

Thank you for your continuing confidence.