Bandon Capital Management [profile] has published research about fixed income funds. The main takeaway? Be wary of investor complacency.

The paper examines the risks of the current low interest rate environment and the challenges of both a prolonged low or rising interest rate future. During a phone interview with the MFWire, author Bill Woodruff — who is also founder, managing principal and CIO of Bandon — pointed to investors' tendency to invest across asset classes without fully considering the risks associated with such investing. Flows into fixed-income mutual funds between 2009 and 2011 totals $740 billion, or more than 15 times the inflows from between 2000 and 2008 ($47 billion), he writes in his white paper. But investors seem to be ignoring the fact that interest rates in the U.S. have been declining for the last 30 years, with little room left for further decline.

"We have used the analogy of driving your car, and driving while looking in the rear-view mirror would be something that we never subscribe to," commented Bandon managing partner, investor relations Mike Miller during the same phone conversation. "Our point is as you think about fixed income road ahead, there are many dangers that the warning signs are posted and that many people are overlooking those danger signs that are coming."

Woodruff points to Bandon's long-short strategy as one solution to complacency. Using short, he says, can help investors hedge potentially unwanted risk factors.

"The use of short — whether in seeking profits or to isolate via hedging specific opportunities — is not just simply an additive part of the portfolio, but really should be looked at as opportunities to create a return profile that's much more attractive than simply buying, holding and doing income risks," he said.

Fixed Income Investing — the Dangers of Complacency is the first in a series of three white papers addressing the fixed-income space. The following two will address more in depth long-short debt as a possible solution and its role in portfolio construction.  

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