Philosophy: Fixed Income

The defining characteristics of Wallington Asset Management’s fixed income philosophy are the use of high quality bonds and conservative maturity structures.

Wallington Asset Management utilizes a four phase approach in the management of fixed income portfolios. First, a fixed income strategy is designed to meet each client’s long-term investment objectives. This is more difficult than generally believed. Each client’s liquidity needs, tax considerations and time horizon constraints are entwined with the investment objective defined for the portfolio. Objectives may include any goal in the spectrum from stability of principal and income to the maximization of long-term nominal returns.

Once these objectives have been defined, Wallington Asset Management will then establish a duration range to manage the sensitivity of each client’s bond portfolio value to changes in interest rates. Since most research evidence indicates that a conservative bond maturity structure allows for the capture of most of the returns offered in longer-dated maturities while incurring proportionately less interest rate risk, our preference is to focus on the intermediate term maturities.

The third phase of our fixed income management employs the use of prudent portfolio strategies on an on-going basis. These strategies are drawn from macroeconomic analysis as well as yield curve and fundamental credit analysis. Our tactics may take the form of composite duration and convexity adjustment, shifts to undervalued sectors, and individual bond swaps. We seek to reap the rewards of credit upgrades and to avoid the risk of credit downgrades.

Finally, we continually monitor the performance of each holding as well as that holding’s contribution to the total interest rate risk of the fixed income portfolio. We believe this fourth step is crucial as we strive to maximize returns within a predetermined level of risk.

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