The Fixed Income Fund will allocate $100,000 across three sectors: U.S. Treasuries, corporate bonds, and securitized credit.
U.S. Treasuries (34%)
Investing in U.S. Treasuries provides unparalleled safety and stability, given their AAA credit rating and backing by the U.S. government. The selected portfolio includes a 5-year Treasury bond with a 3.5% coupon and a Yield to Maturity (YTM) of 4.46%, alongside a 17-year Treasury with a 2.75% coupon and a 5.03% YTM. The shorter-dated bond provides lower interest rate risk and stable income, while the longer-dated bond, trading at a discount, offers higher yields. Together, these investments average a 4.80% YTM, offering an attractive opportunity to lock in strong returns during the current high-yield environment.
The macroeconomic backdrop further reinforces the appeal of these investments. Inflation is moderating, and the Federal Reserve is signaling a pause in rate hikes, suggesting that yields may have peaked. This presents an opportunity to secure attractive returns now, with potential price appreciation if rates decline in the coming years. Slower economic growth also makes Treasuries a preferred safe-haven asset, particularly during periods of uncertainty. By diversifying maturities across 5 and 17 years, this portfolio balances interest rate risk with a need for a higher return.
Corporate Bonds (31%)
Corporate bonds generally offer higher yields compared to government bonds, reflecting the increased credit risk associated with corporate issuers. Corporate bonds play a crucial role in providing diversification and boosting overall returns. They enable us to balance risk and reward, as the fund can select bonds across varying credit ratings, maturities, and industries to align with its investment strategy and objectives.
– Intel
- Intel is currently undergoing major restructuring, their plan includes streamlining operations, reducing costs, and focusing on core businesses, primarily advanced semiconductor manufacturing and design within the USA.
- The U.S. government has emphasized the critical need for domestic semiconductor production to enhance national security and reduce reliance on foreign supply chains. Intel stands to benefit from initiatives like the CHIPS Act, which provides funding, tax incentives, and support for companies investing in U.S.-based manufacturing, bolstering its restructuring efforts and long-term growth prospects.
- Intel bonds currently offer competitive yields of nearly 7%, providing high returns while the company undergoes transformation.
- As a leading player in the semiconductor industry, Intel’s long-term growth prospects remain solid, and its restructuring could further strengthen its competitive edge.
- Intel’s bonds are likely to retain an investment-grade rating, reducing default risk and making them a relatively safe choice.
– Lumen Technologies
- Lumen Technologies, a telecommunications, and IT services provider, focuses on fiber networking, cloud solutions, edge computing, and cybersecurity.
- Lumen Technologies faced significant financial challenges in 2023, including declining revenues and a heavy debt burden, which led to credit rating downgrades and concerns over its financial stability. In response, the company implemented debt restructuring measures to alleviate near-term pressures and improve its balance sheet, as well as pivoting to serve companies in the AI sector.
- Lumen has formed major partnerships with both Meta and Amazon Web Services (AWS) to enhance their network and cloud capabilities and to provide stable income for Lumen.
- Challenges remain for Lumen technologies; however, we believe that the market is underestimating Lumen’s ability to capitalize on the growing demand for networks by major AI companies.
– Liberty Media
- The company’s controlling stake in Formula 1, for example, has become increasingly valuable as the sport grows globally.
- The company is likely to benefit from higher digital content consumption and streaming services, particularly through F1 TV Pro and other media platforms, driving further profitability.
- Despite undergoing financial difficulty, Liberty Media’s 2025 spin-off is expected to streamline operations by separating core business units, enabling a more focused strategy for each entity. Liberty Media will retain F1 and refocus its operations around it, hopefully leading to optimized capital allocation, better debt management, and improved revenue visibility, enhancing the overall financial health of the company.
In summary, investment-grade bonds ensure stable income with low credit risk, while high-yield bonds enhance returns by selectively taking on calculated credit risk. Together, they diversify issuer exposure across technology, consumer staples, telecommunications, and industrial sectors.
Securitized Credit (35%)
The Axonic Strategic Income Fund (AXSIX) is an actively managed, multi-strategy mutual fund managed by Axonic Capital LLC. The fund’s primary objective is to maximize total return by combining current income with capital appreciation. It achieves this through investments in high-yielding structured credit assets designed to deliver consistent cash flows and lower interest rate sensitivity. The fund targets opportunities across a broad spectrum of the structured credit universe, including non-agency RMBS (16%), CMBS (26%), ABS (13%), residential loans (18%) and other related instruments.
Total Portfolio:
The Union fund offers a higher yield to maturity (7.04%) compared to BND (4.73%) but has a lower credit rating (we under-weigh treasuries). Additionally, we currently have a slightly shorter duration relative to BND, indicating less sensitivity to interest rate changes. The yield was calculated based on the weighted average of each bond’s yield. Ratings adhere to S&P’s grading system: Treasury and securitized credit ratings were assigned by the issuers, while corporate ratings were determined using the weighted average of individual ratings to represent the entire sector. Duration was derived by calculating the weighted average of each asset’s duration.
Cash Reserves:
The Fixed Income team has been entrusted with a total of $100,000 to manage. As of now, approximately $71,500 has been allocated to assets, leaving around $28,500 that will be invested into the SPDR Bloomberg 1-3 Month T-Bill ETF (SGOV) as a cash equivalent. These funds serve as a strategic resource, enabling us to remain agile and prepared for future opportunities. Over the coming trimesters, this cash will allow the team to conduct thorough market research and identify high-quality investments that align with our objectives. Moreover, the availability of these reserves ensures that new members of the Student Investment Fund (SIF) have the opportunity to engage in hands-on analysis and decision-making as they join each term, fostering a robust learning environment and strengthening the team’s capabilities.
Prepared by Andrew Keaveney and Julian Murdoch