INNOVATION: RESEARCH

Toxic subprime loan losses in 2007 have seeped into the financial sector, sending equity prices spiraling downward. Respected stocks are at multi-year lows and many predict failure for firms in the sector. This paper examines why the markets are in financial chaos and why they present an intriguing if not once in a lifetime opportunity of return and commensurate risk.

Despite strong historical performance, Metropolitan West Asset Management has recently experienced significant underperformance. This paper explores the factors behind Metropolitan West's underperformance and examines the benefits of continued utilization of this manager, while also providing investors with additional insight into the fixed income market and its future.

2007 was a disappointing year for many US investors as declining home prices revealed the excesses of the subprime loan market and brought the investment banking industry to its knees. This paper looks at the events that allowed the toxic loans of a few imprudent mortgage brokers to bring down such Wall Street titans as Merrill Lynch and Morgan Stanley and how the events of the past six months might impact returns for 2008.

With the Federal Funds Rate at 5.25% the Federal Reserve seems done raising rates for the time being. That's good news for fixed income investors, but is it time to venture up the yield curve in search of higher returns? Perhaps the best strategy is to first figure out which direction "up" actually is…

While interest rates at their lowest levels in the last half century have been good news for borrowers, they should be disconcerting for investors with dedicated fixed income allocations. Rates at their present levels leave little room for the steady interest rate decreases that have fueled bond performance for the past two decades and present investors with the undesirable options of either persistently low yields or even lower total returns should rates increase. However, investors can take steps now to diversify their interest rate risk without increasing the volatility of their overall portfolios. This paper will provide a brief overview of fixed income investments, followed by a discussion of options investors have to reduce the risks associated with the current interest rate environment.

Recent revelations of corporate corruption have left a wide path of destruction in U.S. markets. WorldCom's restatement of earnings as a result of perhaps the greatest case of corporate fraud in history and subsequent bankruptcy filing caught investors by surprise. Metropolitan West Asset Management (MetWest), manager of the Low Duration Bond Fund and the Total Return Bond Fund, had significant holdings in WorldCom bonds resulting in highly disappointing performance for 2002. As a service to our clients, Compass has sought to lay out the facts surrounding the WorldCom fraud, reasons for our continued belief in the process and management of MetWest, and our general perspective on short-term investments.