Should investors consider altering their management strategies in anticipation of rising rates?
Gary: I think for most investors it is not a question of a drastic change, but rather a shift in emphasis or focus. A general management strategy (one that we employ across market environments) is to maintain a yield cushion, to invest in securities that provide a larger income component and/or a greater option-adjusted spread advantage relative to a given mandate or benchmark. This yield cushion can offer protection in a rising rate environment and is something to consider expanding as a rate rise appears more imminent. Furthermore, particularly in uncertain and volatile times like the present, risk management practices in the form of stress-testing and scenario analysis should be emphasized-both at the individual security level and at the aggregate portfolio level. For example, once attractively valued mortgage-backed securities have been identified, it is important to understand how they are likely to perform under a range of interest rate environments-whether the yield curve rises
