Sector Diversification Lowers Volatility, Improves Performance

While the second quarter of 2013 ended with a bond market sell-off, Bank of America Merrill Lynch data shows AAA-rated State general obligation bonds outperforming the broader municipal market by 1.0%: -2.3% versus -3.3%, respectively.  Though AAA-rated State GOs performed well, a mix of high grade state and local GO debt, diversified with strong essential services providers, stable regional healthcare organizations, tax-exempt housing debt, higher education issuers and pre-refunded bonds, produces higher risk-adjusted returns over time.  SNWAM’s goal is to provide high quality and liquid portfolios with superior risk-adjusted returns, and our research shows that portfolios with a mix of sectors produce higher Sharpe Ratios.  A Sharpe Ratio tells us whether the portfolios return is the result of smart investment decisions or the result of excess risk. The higher the Sharpe Ratio the better.  It is important to remember that SNWAM is continually taking an active role to pick the best credit quality bonds, while also considering yield and relative value, ultimately structuring portfolios to minimize risk while increasing yield and return over time.