Dear Investors and Friends,
March was an interesting month. Geopolitical developments, including rising tensions involving Iran, contributed to a meaningful increase in oil prices. That led to concerns about inflation, pushing interest rates higher and putting pressure on bond prices. Equities also came under pressure, reflecting the impact of higher input costs and increased uncertainty.
In a more typical environment, investors might expect bonds, particularly U.S. Treasuries, to provide stability during periods of uncertainty. That is not what happened. U.S. government bonds declined approximately 1.5% on a total return basis during the month, and the broader bond market experienced similar losses, while the S&P 500 declined approximately 5.4%. In a period of uncertainty, both equities and bonds moved in the same direction. That is not what many investors expected.
Markets are complex. Narratives change quickly. The unexpected happens more often than we would like. Environments like this highlight an important concept that is often overlooked: correlation.
What Is Correlation and Why Does It Matter
Correlation measures how investments move relative to one another. When correlation is low, assets behave differently and diversification works. When correlation is high, assets move together and diversification becomes less effective.
This distinction becomes especially important during periods of stress. In calm markets, diversification often appears to work as expected. But when volatility rises, correlations have a tendency to increase, sometimes significantly. Assets that were expected to offset one another begin moving in the same direction.
In stressed markets, correlation often rises at exactly the moment investors need it to fall. When that happens, portfolios can become far more concentrated than they appear.
What Most Investors Actually Own
For many investors, the defensive portion of their portfolio is implemented through broad bond funds or indices. At first glance, this appears conservative. In practice, it often introduces a different type of risk.
Broad bond indices, by construction, tend to allocate more heavily to longer maturity securities. As a result, investors may have significant exposure to interest rate movements extending many years into the future, often without realizing it. Unlike individual bonds, these portfolios do not mature. Securities are continuously replaced, and interest rate exposure remains embedded in the portfolio over time.
In fixed income, the label “bonds” can obscure more than it reveals. The result is that what is intended to provide stability can, in certain environments, behave in ways that are unexpected.
Not All Fixed Income Behaves the Same
At RCM, we build portfolios of individual bonds designed around the specific objectives of each client. That includes income, liquidity, and how the portfolio is expected to behave relative to other parts of the balance sheet. Correlation is not a fixed characteristic. It is influenced by how a portfolio is constructed.
For example, an ultra-short duration portfolio of U.S. Treasury bills will tend to exhibit little to no correlation to equities. A laddered portfolio of high-quality agencies or municipals may have modestly higher sensitivity, but still provide meaningful diversification. A high yield portfolio will have more correlation, but typically far less than equities, particularly when constructed with disciplined risk management and a focus on shorter maturities. “Bonds” can mean many different things, with very different behaviors.
In many cases, we combine these approaches within a single portfolio. A client may have an allocation to ultra short Treasuries for liquidity and stability, alongside municipal bonds for tax efficient income, and a short duration high yield allocation to enhance return. Each component plays a distinct role, and together they create a more balanced and resilient overall portfolio.
By structuring portfolios with defined maturities, diversified across time, we ensure that a portion of the portfolio is consistently turning over, providing liquidity and the ability to reinvest. Even in periods of significant market stress, bonds continue to mature, creating a natural source of stability. The objective is not simply to own fixed income. It is to own fixed income that behaves the way the client expects it to behave.
The Balance Between Stability and Income
It is also important to recognize that portfolio construction involves tradeoffs. Positioning exclusively at the very short end of the yield curve can reduce sensitivity to interest rate movements and may lower correlation to other risk assets. At the same time, extending modestly along the curve can meaningfully increase income and long-term return potential.
At RCM, we seek to balance these factors thoughtfully. In many portfolios, that includes maintaining a laddered structure that extends beyond the very short end of the curve, allowing us to capture additional yield while still benefiting from the stabilizing effect of bonds maturing over time. This approach may not always lead in the short term, particularly relative to portfolios positioned entirely at the front end of the curve. Over full market cycles, we believe the right balance between income, duration, and diversification leads to more consistent outcomes.
The Takeaway
Correlation is not static. It changes, often at exactly the wrong time. That is why diversification is not simply about owning different asset classes. It is about owning assets that behave differently when it matters most.
At RCM, we do not attempt to predict market direction. Instead, we focus on building portfolios designed to perform across a range of environments, with an emphasis on consistency, income, and risk management. Volatility will come and go. How a portfolio responds to it is what ultimately matters.
With gratitude,
David and Mike
Disclaimer
Roosevelt Capital Management LLC is a registered investment adviser. The information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
Past performance is not indicative of future performance. Principal value and investment return will fluctuate. No guarantees or assurances that the target returns will be achieved, or objectives will be met are implied. Future returns may differ significantly from past returns due to many different factors. Investments involve risk and the possibility of loss of principal.
While all the values used in this report were obtained from sources believed to be reliable, all calculations that underly numbers shown in this report believed to be accurate, and all assumptions made in this report believed to be reasonable, Roosevelt Capital Management LLC neither represents nor warrants the values, calculations or assumptions and encourages each prospective investor to conduct their own review of the audits, values, calculations and assumptions.