The Benefits of Being Diversified

We are often asked why we think our Blend Strategy can make sense for a lot of investors, and our response has always been that it gives us the flexibility to take advantage of markets that are not very correlated.  An article in the Wall Street Journal over the weekend highlighted the fact that municipal bonds have outperformed other sectors of the bond market over the past three months, and that there are concerns the sector could falter if certain tax law changes take effect.  This follows similar stories about the corporate bond market three months ago, when corporate bonds were wildly outperforming other sectors of the bond market.  Diversifying across different sectors of the bond market can offer opportunities to take advantage of moves in those sectors, whether it is the possibility of higher tax rates improving the relative value of municipal bonds, as we are seeing today, or the debt crisis in Europe and how it will affect the credit quality of corporate bonds. (Sector diversification also reduces unsystematic risk, which improves risk-adjusted returns.) Having flexibility to go into different sectors of the bond market can make sense for investors who have the ability and risk tolerance to look for longer term investment opportunities.