Worth Knowing: The Crossover Strategy

A fixed income investment approach designed to optimize after-tax yield and after-tax total return

Traditionally, fixed income investors seeking the highest after-tax yield have tended to invest exclusively in municipal securities. That approach has often made sense, particularly during periods when interest rates were higher. However, in today's more volatile and low-interest-rate environment, we believe that seeking the best available after-tax yield and after-tax total return requires looking at all available fixed income asset classes, both tax-exempt and taxable.

In many instances, purchasing a taxable security can provide a better return than a tax-exempt security, even after paying taxes. Certain sectors within the taxable market can offer after-tax yields that are similar to or higher than comparable municipal securities. Moreover, actively allocating away from expensive asset classes to those that we feel offer better value can potentially increase the after-tax total return of the portfolio as well.

Our crossover strategy considers all available fixed income asset classes — tax-exempt and taxable, including at times high-yield, preferred and sovereign securities — designed to achieve the highest after-tax yields and after-tax returns in a way that is tailored to each client's particular needs.

The Advantages

An integrated approach

An integrated approach means a larger set of opportunities and greater potential for portfolios that yield more, on an after-tax basis, than a comparable all-taxable portfolio or an all-municipal portfolio. For many firms, a crossover fixed income strategy means little more than dividing the assets up between different taxable and tax-exempt portfolio managers who essentially operate independently of each other. We have one team examining both taxable and tax-exempt markets together, which we believe improves communication and relative value comparisons between the fixed income sectors and allows for optimal portfolio construction. We look at all of the available asset classes together to find out where the best opportunities are and create an optimized portfolio that seeks the highest after-tax yields.

AR-ARTWDEJU-EXP-2014.12.31

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