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Reams' intermediate fixed
income philosophy is identical to that of their core plus and core portfolios as they seek
to consistently outperform the bond market with duration management and a bond selection
process that uncovers unique opportunities. For intermediate portfolios, Reams adjusts the
process to focus on securities that fit within the maturity constraints of an intermediate
mandate.
Reams actively manages duration by determining whether the bond market is cheap or
expensive. They make this determination by comparing real (inflation-adjusted) interest
rates available in the market to historical real interest rates. When current real rates
are relatively high, portfolio duration will be lengthened above benchmark levels and when
current real rates are below historical levels, portfolio duration is positioned below
that of the benchmark.
Once Reams sets their market strategy, they turn their attention to selecting the most
attractive bonds for the portfolio. Their unique approach to bond selection is based on
several assumptions. First, they believe that most bond investors pay a premium for yield.
Therefore, they focus on the portfolio's total return rather than simply building yield
into portfolios. Reams also believes that the bond market is inherently volatile;
therefore, they purchase those securities that outperform in volatile interest rate and
credit environments. Finally, they have a bias toward unique securities that are often
mispriced, such as commercial mortgage-backed securities or equipment trust certificates.
After subjecting all bonds under consideration to an in-depth scenario analysis, the
portfolio managers select those bonds with the highest expected risk-adjusted return.
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