Fixed-Income Strategies In A Rising-Rate Era

It’s as true in investment planning as it is in physics: What goes up must come down. For fixed-income investors, though, the more pressing fact is that what has gone down must come up.

Interest rates have reached record lows in recent years, and the largest share of the credit goes to the Federal Reserve. Under U.S. monetary policy, the Fed controls the federal funds rate, an important benchmark in financial markets, and by extension, exerts heavy influence on short-term lending rates. Since the 2008 financial crisis, these rates have been kept extremely low; as economic improvement continues, however, they are expected to rise. No one knows when or how fast, but it is safe to say that interest rates have nowhere to go but up.

This is a concern for fixed-income investors because bond prices have an inverse relationship with interest rates. The prospect of rising rates represents risk. All bonds have maturity dates, when the lender-investor is due to receive the bond’s principal amount. The duration of a bond is a calculated figure that represents the average time in years a bond will take to repay the initial investment. How much risk rising interest rates pose to a particular bond’s value largely depends on a bond’s duration; the longer it takes an investor to recoup his or her investment, the more likely the bond is to lose value because of rising rates. As an estimate, the percentage change in value can be expressed as the bond’s duration multiplied by the change in interest rates.

Yet fixed-income investors are not powerless just because a rise in interest rates is inevitable. Nor should investors abandon fixed-income assets; since these assets have a low or even negative correlation to equities, eliminating them from a portfolio increases other risks.

As with any investment plan, there is no one-size-fits-all strategy. The techniques described here are not the only options, and any plan should be tailored to an individual portfolio based on the investor’s risk tolerance, liquidity needs, investment horizon and personal goals. It is also worth noting that the best way to assess various strategies is total return: This includes both the bond’s stated yield and any capital gain or loss arising from the sale of a bond (or bond fund). Further, rising interest rates are not the only risks of fixed-income investments. Credit quality, or the risk of default, stands as the other major risk factor for bond investors, who should evaluate the probability that the borrower will fail to make payments as promised.

Reduce interest rate risk. Perhaps the most straightforward strategy for dealing with the potential for rising interest rates is to reduce the overall duration of a fixed-income portfolio. This is a rather conservative approach, since short-term fixed-income investments generally offer lower yields in exchange for minimizing interest rate risk. Low-duration options include mutual funds, individual bonds, certificates of deposit (CDs), money market funds and government securities.

An investor can match the maturity of many of these investments with short-term liquidity needs, since they offer a full return of principal as long as the issuer does not default. However, most of these options bring their own risk: minimal or even negative “real” returns when taking inflation into account. When held individually, these options also generally offer less diversification, another risk for the holder.

The exception is bond mutual funds. Bond funds will typically include a benchmark average duration to which the manager adheres. This provides for added control over the fund’s role in the investor’s fixed-income portfolio without the need for constant maintenance. An investor mostly concerned with interest rate risk should steer clear of fixed-income funds with long-term duration targets, whether actively or passively managed. An actively managed fixed-income fund not constrained to a specific duration can invest across different products with a variety of maturities, and is likely to adjust its investments according to fluctuations in interest rate expectations. As with any actively managed fund, an investor gives up some control, so it is important to research and trust the manager’s strategy.

With either a passive or an actively managed bond fund, an investor can secure much greater diversification than is possible with individual holdings. Further, costs are often lower as a result of the efficiencies created through bulk purchases unavailable to most individual investors.

Optimize fixed-income yield. For investors who believe that reducing interest rate risk alone is too conservative, maintaining yield will involve looking to other products, increasing credit risk or both. An investor should carefully consider both yield and duration for fixed-income investments in the context of balancing investment goals with risk tolerance.

Many investors may find a role for floating rate or bank loan funds. These funds purchase loans made by banks to companies with below-investment-grade credit ratings, which are typically priced at a certain spread above the London Interbank Offered Rate, or Libor. The underlying loans’ yields generally rise along with broader market rates, protecting investors from most interest rate risk. And, unlike high-yield bonds, floating rate loans have safeguards built in, including collateral, performance-based covenants and a senior position within a company’s capital structure. Many have provisions that do not adjust the coupon, or periodic interest payment, lower than a set floor should interest rates fall. These funds are beneficial when interest rate risk is a greater concern than the credit risk of the underlying investments.

Other options can be useful, depending on an individual’s tax situation. For example, tax-free bond funds can provide more attractive after-tax returns than taxable fixed-income funds for investors in certain tax brackets, depending on the yields they offer. Since they involve municipal securities, such bond funds also add diversification. However, municipal securities are not immune to default, so it is important to evaluate the municipality’s current financial position and future prospects.

Some investors may also wish to consider alternative products that act similarly to fixed-income investments. Various absolute return or hybrid strategies that may not actually hold fixed-income securities can produce similar risk and return characteristics. One example is merger arbitrage, which entails a hedge fund strategy achieved by, in its simplest form, purchasing shares of a merger acquisition target at a slight discount to the expected value upon completion of the deal. This price difference is known as the arbitrage “spread” and is captured as long as the deal is completed. If it falls through, other protection hedges leave investors virtually where they started before the investment was made. Merger arbitrage strategies are often offered through fund companies, leaving many of their intricacies to experienced managers rather than to individual investors.

The damaging effects of inflation on a fixed-income investor’s purchasing power should also be of concern. Many investors make the mistake of believing that Treasury Inflation-Protected Securities (TIPS) provide a risk-free source of true inflation protection. But “risk-free” is hard to come by, and TIPS are no exception. Long-term TIPS carry significant interest rate risk similar to that of other long-term securities. Further, if actual inflation significantly deviates from expectations, TIPS’ value can slide. Hybrid strategies that incorporate inflation swaps alongside short-term fixed-income holdings are an effective way to mitigate the effects of inflation while keeping interest rate risk low. An inflation swap generally involves one party paying a fixed rate on the swap amount in exchange for a floating-rate payment based on actual inflation.

When attempting to optimize yield, high-yield bond funds initially may seem attractive. High-yield bonds are issued by below-investment-grade corporations, and so must pay a higher coupon to attract investors. These “junk bonds” can pair a short duration with the high coupon, leading to less sensitivity to interest rate changes, too. However, the risk of default may be high enough to largely offset the cushion provided against interest rate changes by the higher yield.

Reduce reinvestment risk. An often-suggested method for mitigating the risk of rising interest rates is the “laddered” bond portfolio, consisting of individual bonds with staggered maturities. As shorter-term bonds mature, the investor reinvests the proceeds into the longest-term “rung” of the ladder, providing a higher yield as long as interest rates are increasing. The staggered maturity payouts also create flexibility, so the investment can be redirected to more advantageous strategies if interest rates suddenly fall. This concept is known as reinvestment risk, or the risk of future coupons and maturity payouts being reinvested at rates lower than the initial bond purchase.

Private Startup Investing Revolutionized

For more than 80 years, people have wanted to allocate a piece of their portfolio – even just $10k – to a compelling, high-risk/high-reward venture. The problem was, until the JOBS Act was passed a couple of years ago, and the rules were written even more recently, you had to be a venture capitalist or private equity firm to even see those groundfloor deals (that is, unless your cousin hit you up for cash on his new social media startup). The game has changed, and you can now see private deals offered under Regulation D, Rule 506(c) if you are accredited. Companies that qualify for the exemption can now conduct a general solicitation of accredited investors.

The progressive startups will win, and must adjust quickly to take advantage of the new law. If a startup can get their deal in front of the average investor, the chances of winning at completing a fundraise — even faster than a venture capital group could fund the same company — will be very likely. Venture group used to get all the action, and the average investor missed out. Missing out was the norm. But the norm has changed. Groundfloor level positions used to be exclusive to those who were “in the know.” Not anymore. The average investor is now at par with the big boys.

Some startups to avoid are those that do not offer risk mitigation. If a startup offers risk mitigation, the chances of private ‘untapped’ investors underwriting the fundraise increase dramatically!

Company after company are now launching their private fundraise to support their growth using Rule 506(c). Unique deal structures are, therefore, being demanded. Unique deal structures, for example, that provide a “wait and see” option to convert to an equity stake in the company at the investor’s discretion will become more popular. Such structures allow investors to enjoys an interest rate while they wait and see if the startup skyrockets or gets acquired for a premium. And if it doesn’t, well, that’s where the unique structure would apply.

To be clear, startups must provide risk mitigation to investors in order to really stand out in the crowd. Investors want deals that are designed to stand out in the crowd. Effectively, deals that provide a hedge for investors in a best-of-both-worlds scenario: enabling investors to jump into a high-potential tech investment, but without the typical risk exposure. Knowing that there are millions of investors in America, the key for any startup is generating traffic and being able to quickly monetize it. This means that online gateways are needed that:

· qualifies prospective investors,
· provides complete disclosures of the offering to investors,
· issues serialized offering documents to investors,
· provides for investors to complete subscription documents, and
· accepts investment transactions.

In an era where private capitalization has been unshackled, those who ‘know how’ to take advantage of the new law can help blaze a trail for compliant general solicitations. But without an online gateway, it’s impossible!

The future is now – and for those previously blocked investors from deal flow, there simply isn’t a smarter way to invest. It’s like a modern day gold rush for both sides: investors and fundraisers.

Citizenship by Investment in Cyprus

The Council of Ministers updated the conditions for naturalisation of investors in Cyprus by exception, based on subsection (2) of section 111A of the Civil Registry Laws of 2002-2013. According to the verdict laid out on March 19, 2014, a non-Cypriot citizen may apply for the attainment of Cypriot citizenship, if he or she has purchased state bonds, invested in financial assets of Cypriot companies or Cypriot organisations, invested in real estate, land development and infrastructure projects, maintains deposits in Cypriot banks, has business activities in the country or suffered an impairment of deposits due to the resolution measures implemented.

Applicants interested in attaining Cypriot citizenship are required to complete the M127 form and submit certain documentation. In all cases, investors need to submit the contract of sale and a confirmation of settlement of their residence. Further documentation is also required, depending on the case.

CRITERIA AND DOCUMENTATION:

A1. Purchase of state bonds

The investor must have bought state bonds of the Republic of Cyprus of at least €5 million.

Documentation Required

Receipts from the Treasury of the Republic of Cyprus for the purchase of the state bonds.

A2. Investment in financial assets of Cypriot companies or Cypriot organisations:

The investor must have obtained financial assets of Cypriot companies or Cypriot organisations, i.e. bonds, securities, debentures registered and issued in the Republic of Cyprus of at least €5 million.

The financial assets can be obtained at issuance or by the market.

Documentation Required

a. Title/titles and other documents concerning the financial assets.

b. Copy of the bank transfer in the Cypriot commercial banking institution in the name of the company or the organisation.

A3. Investment in real estate, land development and infrastructure projects:

The investor must have pursued an investment of at least €5 million for the purchase or construction of buildings or for the construction of other land development projects, such as residential developments, commercial developments, developments in tourism or other infrastructure projects.

Documentation Required

a. Contract of sale.

b. Title Deeds/ Receipt for lodging the contract with the Lands and Survey Department.

c. Payment receipts of the agreed purchase amount.

d. Copy of the bank transfer in the Cypriot commercial banking institution in the name of the vendor or the vendor’s company.

A4. Purchase or creation or participation in Cypriot businesses or companies:

The investor must have invested at least €5 million in the purchase, creation or participation in businesses or companies, based and operating in the Republic of Cyprus. Apparently, these businesses or companies should have real presence in Cyprus and employ at least five Cypriot citizens. It should be underlined that the required conversion of deposits into shares is comprised in this criterion.

Documentation Required

Contract of sale.
Payment receipts of the agreed amount of purchase.
Certificate of shareholders by the Registrar of Companies or certificates proving that the investor is the beneficiary owner of the company/companies.
Copy of the bank transfer in the Cypriot commercial banking institution in the name of the company or the organisation.
Confirmation from the Social Insurance Department concerning the insurable income of the Cypriot employees in the company.
Confirmation from the Inland Revenues Department concerning the taxable income of the Cypriot employees in the companies or businesses that the eligible investor invested in.
A5. Deposits in Cypriot Banks

The eligible investor must maintain private fixed term deposits for a three-year period in banking institutions of the Republic or deposits of privately owned companies or trusts in which the investor is the beneficiary owner of €5 at least million.

Documentation Required

Confirmation of Cypriot banking institutions concerning the fixed terms deposits for three years of the investor or the companies or the trust in which the investor is the beneficiary owner.
Copy of the bank transfer in the Cypriot commercial banking institution.
A6. Combination of criteria A1-A5

An individual is eligible for the acquisition of Cypriot citizenship, if he or she has a combination of the above, i.e. investment in government bonds, investment in financial assets of Cypriot companies or organisations, investment in real estate, land development and infrastructure projects, purchase or creation or participation in Cypriot businesses or companies and deposits in Cypriot banks, to at least €5 million.

A7. Investors with impaired deposits after bank resolution

Individuals whose deposits with Laiki and Bank of Cyprus have been impaired due to the restructuring measures implemented after March 15, 2013 may apply for naturalisation. In order to be eligible, the amount of their deposit impairment should be no less than €3 million.

In the event that an investor had suffered impairment in his or her deposits below €3 million, he or she may still apply, under the condition that he or she has made an additional investment through the criteria A1-A5 (purchase of state bonds, investment in financial assets of Cypriot companies or Cypriot organisations, investment in real estate, land development or infrastructure projects, purchase or creation or participation in Cypriot businesses or companies and deposits in Cypriot banks) amounting to the balance required of the above-mentioned criteria.

Documentation Required

Confirmation regarding the extent and date of the impairment of deposits.
b. When it comes to deposits in companies in which the investor is the beneficiary owner, the certificate of registration of the company by the Registrar of Companies and/or any other relevant evidence need to be submitted.

A8. Major Collective Investments:

The Council of Ministers shall have the authority on special occasions, to reduce the criteria A1 (Purchase of state bonds), A2 (Investment in financial assets of Cypriot companies or Cypriot organisations), A3 (Investment in real estate, land development or infrastructure projects) and A4 (Purchase or creation or participation in Cypriot businesses and companies):

I. To €2 million for investors who evidently participate in a special collective investment scheme under the condition that the total value of the investment is more than €12.5 million.

The provision (I), the investment Criteria A1-A4 could be accomplished through different seller/ provider (physical or legal entity).

Terms and Conditions

Investors who satisfy the criteria for applying for naturalisation must have a clean criminal record. Moreover, their names must not be incorporated in the list of individuals whose assets are ordered to be frozen within the European Union borders.

Additionally, applicants must hold a permanent privately-owned dwelling in the country, the market value of which must be worth a minimum of €500.000 plus V.A.T. It should be clarified that family members, who apply independently as investors, are eligible to obtain a residence collectively, under the condition that the total price of the particular home-property covers the amount of € 500.000 per each applicant

Source of Site Traffic That Can Help You Get Past Google

Are you willing to invest in a more long-term and reliable organic traffic source for your website? Then let’s look at a search engine that can assist you in increasing your traffic.

Interview an Influencer or Get Interviewed by a High-traffic Website

Have you heard of Tim Ferriss, the author of the Four-Hour Work Week?

His podcast is nowadays a staple content type that he provides to his viewers. Tim’s show has world-class performers who share their insights on a variety of topics, and he is well-liked on social media. Do Tim’s fans enjoy the show? So far, the show has received over 50 million downloads. On most days, it’s the most popular business podcast on iTunes.

Interviews, whether on video or audio, are inherently conversational, lively, and engaging. The great aspect is that it’s a win-win situation for both sides. The interviewer is exposed to a new audience, while the interviewee is able to provide his website visitors with new fascinating and authoritative information. You can ask an industry influencer to share your interview with their followers on social media if you interview them. Consider the organic traffic you’ll get from their social media followers, which number in the hundreds of thousands. Consider the level of interest generated by a prior Derek Sivers interview on the Tim Ferriss Show. Derek shared the show’s URL with his 283K followers on Twitter. It won’t hurt if you establish a relationship with the influencer as a result of the interview.

Similarly, being interviewed by a high-ranking website can result in a significant increase in search engine traffic. Harsh Agrawal’s blog, Shoutmeloud, received 35,000+ views in a single day after he was profiled by YourStory. That was the blog’s most popular search engine traffic source (with 600,000+ monthly visitors). Because interviews provide consolidated value, they can be used as a long-term lead generating source for your company. Consider how many bloggers you’ve learned about through interviews on YouTube and other high-authority websites.

You may also conduct a Reddit AMA if you have a very compelling storey to tell. Mateen’s AMA got about generating $85,000 in profit by selling TeeSpring shirts/hoodies received 2000 page views. He also boosted the number of visitors to his website on a daily basis.

By registering as a source with HARO, you can also answer queries from journalists. On HARO, Christopher from Snappa came across this question from Inc Magazine about the future of content marketing. He swiftly responded with a thorough response. He was mentioned in Inc a few weeks later as a result of this. HARO is an excellent strategy to have your brand mentioned on authoritative news sites such as Entrepreneur and Inc. Those backlinks will enhance your search engine traffic and increase your marketing strategy by improving your reputation in Google’s eyes. Contact an SEO agency to find out how you can do this and how they can manage it for you while you work on the bottom line of your business.