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FIXED INCOME PORTFOLIO
IN TODAY’S UNCERTAIN MARKETS, you’re likely looking for a partner to meet
your fixed income objectives. Let Innealta Capital work with you to cultivate your
portfolio with our research-based, quantitative approach to fixed income investing.
THE FIXED INCOME PORTFOLIO is an actively managed, global fixed
income strategy that aims to generate above-average yield subject to strict risk
considerations. The strategy invests in those fixed income sectors that we believe
have favorable risk-adjusted expected performance.
The strategy is operated within a quantitative framework that seeks to objectively
control the portfolio-level yield, modified duration, and volatility. The process
starts with the collection of daily information of constituent sectors. This enables
close monitoring of the fixed income universe, as it is represented within the ETF
space. This information is then incorporated into our proprietary quantitative
framework to algorithmically optimize the expected return and risk ratio.
INNEALTA CAPITAL
Innealta Capital is a division of AFAM Capital,
Inc., an SEC Registered Investment Advisor
and a privately held company founded
in 1977. Innealta is a quantitative asset
management firm offering risk-managed,
global investment solutions implemented via
exchange-traded funds (ETFs).
The investment process is managed by
an experienced team of PhDs and CFA
charterholders.
Innealta’s Fixed Income Portfolio utilizes
an optimization methodology that aims to
maximize expected return, subject to various
risk constraints across a wide spectrum of
fixed income sectors.
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WHY CHOOSE
INNEALTA CAPITAL?
Experienced in Tactical
ETF Portfolio Solutions.
INVESTMENT MANAGEMENT TEAM
Innealta Capital has extensive experience managing
ETF portfolios and offers a diverse selection of riskmanaged, global investment solutions implemented with
ETFs. Exchange-traded funds offer several advantages
including transparency, liquidity and cost efficiency.
Co-Chief Investment Officer
Founded in Fixed Income
Management.
Innealta’s roots in fixed income run deep. Our founder
and Co-CIO served as the Vice President of Curriculum
Development for the Association for Investment
Management and Research (AIMR), now known as the
CFA Institute. In this position he helped develop the
Fixed Income portion of all three CFA exam levels. The
Fixed Income Portfolio is the cornerstone upon which all
other Innealta products are constructed.
Aligned with Investor Objectives.
The Innealta portfolios are designed to align with
investors’ objectives in achieving their long-term
financial goals. For example, the strategy attempts to
provide greater returns than a traditional fixed income
portfolio in all interest rate environments.
Vito Sciaraffia, PhD
• Previous experience includes Dimensional Fund Advisors, Citigroup, and JP Morgan
• Former Assistant Professor of Finance at the McCombs School of Business at the University of Texas at Austin
• PhD, MS in Business, and MA in Mathematics from the University of California at Berkeley
• MBA and MFin from the University of Chile and BS in Economics from the Pontifical Catholic University of Chile
Gerald Buetow, PhD, CFA
Co-Chief Investment Officer
• Previous experience includes XTF GAM, Atlantic Asset Management, and Prudential Investments
• Former Vice President of Curriculum Development at the CFA Institute
• Former Wheat First Professor of Finance and Director of Quantitative Finance at James Madison University
• Authored two books on term structure modeling and interest rate contingent claim valuation
• Published in over 40 academic and practitioner journals
Brian Henderson, PhD, CFA
Senior Researcher
• Associate Professor of Finance at the George Washington University
• PhD and MS in Finance from the University of Illinois at Urbana-Champaign
• BS in Quantitative Finance from the James Madison University College of Business
• Published in the Journal of Financial Economics, Review of Financial Studies, and Journal of Fixed Income
Mark Mowrey, CFA
SVP, Portfolio Manager
• Over 15 years of experience quantitatively evaluating public equity markets using fundamental methods
• Former public equity research analyst, private equity financier, consultant, and entrepreneur
• BS in Economics from The Wharton School of the University of Pennsylvania
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WHY ACTIVE MANAGEMENT?
• There are many different fixed income sectors, and their respective returns can
vary materially over time.
• The table to the right illustrates how the returns of fixed income sector can
fluctuate from year to year.
• We believe that an active approach to fixed income investing can mitigate risk
and add value over time.
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TACTICAL
DECISIONS OVER TIME
Increased U.S.
Corporate allocation
for more attractive
yield spreads over
Treasuries.
Decreased portfolio
duration in anticipation
of a “bear steepener” to
the term structure of
interest rates.
Reduced International
exposure due to
extended valuation and
evolving risk dynamic.
100%
75%
50%
25%
0%
2010
2011
Cash
U.S. Bond − Invest Grade
2012
U.S. Bond − HighYield
MBS
2013
U.S. Bond − Gov’t only
Int’l Bond (non−U.S. dollar)
2014
2015
Int’l Bond (U.S. dollar)
From 12.31.09 to 06.30.15. Data on this page are derived from composites of portfolios managed directly by Innealta
Capital. Holdings and performance data of those portfolios managed and/or otherwise traded by partners of Innealta
Capital may differ greatly from these data. SOURCE: Innealta Capital
The evolution of the ETF industry has considerably widened the fixed income opportunity set
for our strategies. The Innealta Fixed Income Portfolio is a diversified, multi-sector, global
portfolio offering granular fixed income exposure. The portfolio takes an active approach to
yield and duration management, as illustrated by the portfolio’s exposures over time in the
chart above. Additionally, the portfolio is not constrained by benchmark-specific guidelines,
which allows us to capitalize on favorable investment opportunities for one sector over
another, while aiming to avoid areas of the market where we see greater downside risk.
ETFs allow us to efficiently manage portfolio risk with rigorous precision and tactically alter
exposures among sectors when it is most desirable.
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A FLEXIBLE APPROACH
REASONS TO CONSIDER INVESTING
Broad Opportunity Set
Access to global sectors of
the fixed income ETF universe
Flexible
Disciplined Approach
Ability to add sectors of the
fixed income ETF universe
with the potential for attractive risk-reward profiles
Our investment approach
utilizes a proprietary
optimization methodology,
combined with the expertise
of experienced fixed income
managers
WHY CHOOSE THE
FIXED INCOME PORTFOLIO?
In today’s interest rate environment, having a
flexible and active approach to fixed income
management can be critical to meeting clients’
investment objectives. The Innealta Fixed Income
Portfolio is a nimble and opportunistic strategy
that seeks to provide optimal risk-relative
returns over longer-term investment horizons.
The portfolio invests broadly across global fixed
income markets and is highly unconstrained,
making it unique from traditional bond portfolios
that may struggle in a rising rate environment.
Not all bonds react identically to rising interest
rates. A 1% rise or decline in interest rates
impacts the value of various types of bonds
in disparate magnitudes. Volatility in bond
prices and yields require an active approach
to generating income, growing portfolios,
and preserving wealth. With the help of ETFs,
Innealta’s Fixed Income Portfolio navigates
seamlessly between fixed income sectors based
upon the underlying risk-return characteristics.
Price Impact of a 1% Rise/Fall in Interest Rates1
FIXED INCOME ETF UNIVERSE
International
Aggregate
Aggregate
Sovereign
Corporate
Global
U.S.
Aggregate
Treasuries
TIPS
Agency
Municipal
Corporate
Aggregate
Treasuries
TIPS
Agency
Municipal
Corporate
Mortgage
International
Regional
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As of 06.30.15. SOURCE: JP Morgan Asset Management
Aggregate
Sovereign
Corporate
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HOW TO USE THE
FIXED INCOME PORTFOLIO?
Providing Investment Solutions through Flexibility
The Fixed Income Portfolio’s unconstrained investment approach may help provide solutions
to a broad range of investor needs.
Innealta Fixed
Income
Innealta
Fixed Income
Portfolio
Traditional /
Laddered Bond
Portfolio
Satellite
Using the Fixed Income Portfolio:
• Core / Stand-alone fixed income portfolio
• Satellite to a traditional, or laddered, bond portfolio
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IMPORTANT NOTES
The material herein has been provided by AFAM Capital, Inc. and
is for informational purposes only. AFAM Capital is a Registered
Investment Advisor, is editor of The Prudent Speculator
newsletter and is the Investment Advisor to individually managed
client accounts and certain proprietary mutual funds distributed
through Northern Lights Distributors, LLC, member FINRA/SIPC.
Northern Lights Distributors, LLC and AFAM Capital, Inc. are not
affiliated entities. Innealta Capital is a division of AFAM Capital.
Registration of an investment adviser does not imply any certain
level of skill or training.
The Innealta Fixed Income strategy is an actively managed portfolio
of fixed income ETFs based on a classical constrained optimization
approach for fixed income sectors. The portfolio aims to generate
above-average yield with strict risk controls by investing in those
fixed income sectors that we believe have favorable risk-adjusted
performance potential and eligible ETF representation.
The Fixed Income Portfolio’s constrained optimization approach aims
to maximize expected return subject to various risk constraints across
a wide spectrum of fixed income sectors. The strategy is operated
within a quantitative framework that seeks to objectively control the
portfolio-level yield, modified duration and volatility. The process
starts with the collection of daily information of constituent sectors.
This enables the close monitoring of the fixed income universe
as it is represented within the ETF space. This information is then
incorporated into the quantitative framework so that we can try
to algorithmically control for both risk and yield. The framework is
implemented as frequently as necessary in order to help capitalize on
potential investment opportunities as they arise. The frequency of the
framework can be implemented daily and no less than quarterly.
The benchmark for the Fixed Income Portfolio is the Barclays Capital
Aggregate Bond Index, which covers the U.S. dollar-denominated,
investment-grade, fixed-rate, taxable bond market of SEC-registered
securities. A person cannot invest directly in an index.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Any
investment is subject to risk. ETFs are subject to risks similar to those
of stocks, such as market risk, and investors who have their funds
invested in accordance with the portfolios may experience losses.
Additionally, fixed income (bond) ETFs are subject to interest rate
risk, which is the risk that debt securities in a portfolio will decline in
value because of increases in market interest rates. Real estate ETFs
are subject to the risk that real estate stocks will decline because of
adverse market conditions for the real estate industry or declines in
real property values. For more information on the risks associated with
an investment in ETFs, please refer to AFAM’s Form ADV Part 2A.
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Contact Innealta Capital at
855.994.2326
12117 FM 2244
Building 3, Suite 170
Austin, Texas 78738
www.innealtacapital.com
480-AFAM-11/30/2015