Fixed Income

Lowe, Brockenbrough's fixed income process seeks to provide total returns consistently above a passive index through active portfolio management while minimizing both credit and volatility risk.

STYLE

Our fixed income style incorporates maturity and sector decisions to generate superior returns while managing risk. Security selection emphasizes high quality instruments to minimize credit risk, and portfolios are tailored to meet a client's income and liquidity needs. Low turnover is another important characteristic because the transaction costs of a high turnover style can significantly diminish fixed income return. LB&C applies its highly disciplined approach to fixed income management. Finally, we believe that the investment management process requires consistency of results, and our fixed income style is a product of that philosophy. As with any capital markets discipline, success is directly related to a well structured and time tested decision making process. LB&C's fixed income process comprises three major elements - duration, yield curve and sector weightings.

DURATION

The most important decision for fixed income management is determining the duration of a portfolio. Duration refers to the weighted average maturity of the present value of the expected cash flows of a portfolio; it is used to measure the price sensitivity of a portfolio to changes in interest rates.Our view on the direction of interest rates is expressed by a portfolio's duration relative to that of its benchmark. If we believe interest rates are headed lower, we will construct a portfolio with duration longer than that of our benchmark. Conversely, if we believe rates are headed higher, we will adjust the duration of our portfolios to be shorter than that of the benchmark. The investment process is highly data dependent, and LB&C has committed the resources to provide state-of-the-art data delivery systems. Portfolios are monitored in current market conditions and tested under various hypothetical interest rate environments using proven analytical models.

YIELD CURVE

In addition to forecasting the trend of interest rates, LB&C analyzes the shape of the yield cure as part of the risk/reward analysis used in optimizing the portfolio structure. A variety of yield curve tools are used to analyze the curve and to determine value. Most are based on historical intra-curve spread relationships. We believe historical relationships are important in determining not only relative value along the curve, but also in predicting the most probable shape the curve will take. Although our system for analyzing the curve is very quantitative, we realize there is no "black box" which will replace judgment and investment experience. We eliminate as much uncertainty as possible by the disciplined use of quantitative analysis.

SECTOR FORECASTING

Once maturity structure is determined, we emphasize our specialty of sector forecasting. Our sector forecasting examines interest rate changes, supply and demand factors, historical yield relationships, credit risks and call features. Our sector work seeks to identify and take advantage of opportunities that represent value. Just as we use a discipline for anticipating the direction of rates and yield curve analysis, we also use a systematic discipline in the valuation of sectors incorporating historical yield spreads, credit risks, market volatility, call features and supply-demand variables. We begin this process by examining historical yield relative to inter and intra sector alternatives with comparable maturities. When our analysis indicates that a sector has become undervalued, we will overweight this sector to participate in its anticipated strong performance. Such sector rotations are made on an ongoing basis.