Lane Asset Management

July 2010
A Special Focus on “Fixed” Income Investing

Special points of interest:

This special focus is on ―fixed‖ in-
 Global bonds have per- come investing. Generally speaking,
formed admirably com- there are several types of invest-
pared to U.S stocks ments considered fixed income.
over the last 30 years The most common of these are
 By paying attention to U.S. and foreign government bonds,
relative performance municipal bonds, corporate bonds,
trends, it appears possi- and preferred stocks.
ble to shift between eq- Fixed income investments may be
uities and fixed income used on an individual security basis
to one’s advantage or bought through an exchange-
 While individual bonds traded fund, a closed-end fund or
have their place in a an open-end (conventional) mutual
portfolio, funds provide fund.
distinct advantages I put the word ―fixed‖ in quotation
 Weakness in the dollar marks since very few specific in-
and low domestic inter- vestments in this category actually
est rates at present fa- produce a fixed total return with a
vor unhedged interna- high degree of certainty. Those
tional and emerging that do would be individual bonds
market bonds over do- held to maturity (assuming no de-
mestic bonds fault).
Other fixed income investments, if
sold prior to maturity, or funds of
any type, carry a risk of gain or
loss in principal value as a result of
a shift in interest rates since the
security was purchased.
There are many considerations to
take into account when investing
in fixed income securities. While
it is not my plan to go into all the
considerations here, they are im-
portant and should be reviewed
with one’s investment advisor.
Rather, I will use this Focus to
shed light on historical returns and
selected investment strategies.
Examining Fixed Income Returns
Before discussing return analysis,
let me point out that the perform-
ance figures of such analyses are
always subject to their starting and
ending points. Since the period
over which the returns are ana-
lyzed and compared to alternative
investments can greatly affect the
results, such analyses may be mis-
leading and should be taken with a
grain of salt.
For example, according to stock-
charts.com, the S&P 500 index had a
compound annual rate of return be-
tween January 1, 1980, and Septem-
ber 30, 2010 (30 3/4 years), of about
7.3%. If, however, the measurement
date ended September 30, 2010 (at
about the time the current recession
started), the annualized return for
the 27 3/4 year period is about9.5%.
Stating this another way. $1,000 in-
vested at the beginning of 1980
would have grown to about $12,400
by September 30, 2007, but if left
invested three years longer, would
amount to only about $8,700 by
September 30, 2010, almost 30%
less.
As you can tell, the ending point
made quite a bit of difference!
Given the growth the S&P 500 over
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the 27– and 30-year periods indicated, you
might be surprised to discover that global
bonds as represented by the Barclay Capital
Global Bond Index (previously the Lehman
Global Bond Index — see comments on page
6) annualized returns were about 9% for both
measurement periods!
The graph on page 4 illustrates the total re-
turn for both indexes from January 1, 1980 to
June 30, 2010. The following observations
and comments can be made:
 The Global Bond Index not only had
comparable or better returns for the ob-
served period, but was much less volatile;
 Starting and ending points are critical as
the S&P 500 easily outperformed the
bonds in the 1995-2000 and 2003-2008
periods, roughly speaking;
 The relative stability of the bond index
returns over the measurement period
would suggest a more reliable pattern of
return even though past performance
should not be used as a predictor of fu-
ture results;
 The two ―bubbles‖ that occurred in the
equity markets make it more difficult to
establish a reliable long-term expected
rate of return for domestic equities; my
own suspicion, however, is that the
bubbles represent extraordinary results
and that ―true‖ long-term returns from
U.S. equities, broadly speaking, are
more likely to be closer to the 30-year
trend ending in mid-2010 than the 28-
year trend ending in 2007.
The graph on page 5 shows the ratio of the
monthly performance of the S&P 500 Index
to the Barclay Capital Global Bond Index.
Here we see, for the measurement period,
the general outperformance of the bond
index interrupted by spikes in the outper-
formance of the equities. What I think is
noteworthy here is that this graph shows it
is possible do well and still ignore the
spikes in relative over– and under-
performance IF one takes advantage of the
longer term pattern as provided by a suit-
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able moving average, in this case, the 30-
week moving average.
Putting Historical Performance Knowl-
edge to Work
Before describing possible investment
strategies, the following should be noted:
 The S&P 500 equity index shown is
not necessarily representative of all
equity sectors, and especially not in-
ternational equities;
 While there are a number of invest-
ment choices (funds) that will mirror
the performance of the S&P 500 in-
dex at low cost, in my research,
there were none that came close to
reproducing the performance of the
Barclay Capital Global Bond Index
over the 25-30 year period.
Having said that, here are a few strategies
that make use of this analysis:
 In a balanced portfolio, weightings
between equities and bonds might
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follow the relative performance charac-
teristics of the indexes rather than adopt-
ing a buy-and-hold approach;
 A combination of exchange-traded and
other funds may be used to approximate
the performance of the Barclay Capital
Global Bond Index using the same tech-
niques to select among domestic and in-
ternational hedged and unhedged funds as
is used to adjust the balance between
 As the selection and management of
individual bonds is time-consuming and
complex, I suggest limiting individual
bonds to a smaller portion of one’s to-
tal portfolio. Individual bonds should
be purchased with the anticipation of
holding to maturity and, in today’s envi-
ronment, kept to durations of under 5
years or so.
 Bond funds provide flexibility, diversifi-
preferred stocks which are also offered
through funds.
 Think of preferred stocks as perpet-
ual bonds with higher risk than bonds
(but less than common stocks).
 Preferred stocks are usually concen-
trated in the financial and utility sec-
tors.
 Preferred stocks may have tax-

fixed income and equities;
 In view of very low U.S. interest rates and
the growing potential for increases in the
not-too-distant future, caution is advised
cation and securities management at advantaged distributions, but this is
low cost. For non-U.S. bonds, such subject to change.
funds are essential. A good source of information on fixed
 Closed-end funds may employ leverage income investments can be found at

about long maturities on domestic debt; (borrowing) to enhance returns. http://www.quantumonline.com.

in fact, a focus on shorter maturities and Should short-term interest rates turn ** *** **
a laddered approach would be very sensi- upward in any significant way, fund total
ble; and return may be severely impacted.

 By the same token, a weakening dollar
enhances the role of foreign debt even
though this adds a complicating wrinkle of
sovereign and currency risk.
Regarding individual bonds vs. bond funds:
 Closed-end funds may sell at a discount
or premium to net asset value (NAV)
which can impact long term returns.
Regarding other types of fixed income in-
vestments, the most common of which are
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Disclosures
Lane Asset Management is a Registered Investment Adviser with the States of NY, CT and NJ. Advisory services are only offered to clients or
prospective clients where Lane Asset Management and its representatives are properly licensed or exempted.

No advice may be rendered by Lane Asset Management unless a client service agreement is in place.

Stock investing involves risk including loss of principal. Investing in international and emerging markets may entail additional risks such as cur-
rency fluctuation and political instability. Investing in small-cap stocks includes specific risks such as greater volatility and potentially less liquid-
ity. Small-cap stocks may be subject to higher degree of risk than more established companies’ securities. The illiquidity of the small-cap mar-
ket may adversely affect the value of these investments.

Investors should consider the investment objectives, risks, and charges and expenses of mutual funds and exchange-traded funds carefully for a
full background on the possibility that a more suitable securities transaction may exist. The prospectus contains this and other information. A
prospectus for all funds is available from Lane Asset Management or your financial advisor and should be read carefully before investing.

Note that indexes cannot be invested in directly and their performance may or may not correspond to securities intended to represent these
sectors. It should be noted that the Barclay Capital Global Bond Index shows a lack of volatility that, in my research, was not achieved in any
single fund over the 25-plus year period used in this presentation. Achieving comparable results in terms of ―smoothness‖ or performance on
a prospective basis through a combination of funds cannot be guaranteed.

Investors should carefully review their financial situation, making sure their cash flow needs for the next 3-5 years are secure with a margin for
error. Beyond that, the degree of risk taken in a portfolio should be commensurate with one’s overall risk tolerance and financial objectives.

Periodically, I will prepare analysis focused on a specific investment issue. Please let me know if there is one of
interest to you. As always, I appreciate your feedback and look forward to addressing any questions you may
have. You can find me at:
www.LaneAssetManagement.com
Edward.Lane@LaneAssetManagement.com

Lane Asset Management

P.O. Box 666
Stone Ridge, NY 12484