Description
With interest rates near all-time lows, what are fixed income investors to do? First, they need to ask themselves why they
own bond funds in the first place. Do they want diversification, are they seeking income, or a combination of both? Owning
a portfolio of individual bonds can be quite an expensive endeavor, and the income still may not meet the investors’ needs.
Again, many investors are more comfortable with the potential diversification benefits and professional management of mutual
funds. There are many other asset classes and categories of mutual fund solutions that provide diversification for stock-centric
portfolios. If an investor is concerned about the low rate environment and the potential for rising rates, they may wish to
consider looking beyond traditional bond funds.
For investors seeking diversification, there are other asset classes
with a history of low correlation to traditional stocks and bonds.
For investors who are able to tolerate some levels of risk, they
may want to consider alternative assets and consider looking
outside of the U.S.
markets. If income is the primary focus, many regions around the world have higher prevailing market interest rates than the rates found within the U.S. fixed income markets. For investors who are more risk averse, there are ways to maintain exposure to fixed income without maintaining such a high level of interest rate sensitivity.
Many nontraditional bond funds have the ability to change course as the markets shift. A long/short bond fund can invest in bonds as rates are flat or falling, but have the ability to profit during rising rate environments by shorting bonds—i.e., taking the opposite side of the trade by investing against the bond market. Some nontraditional bond funds may also have the ability to put assets into cash and stay away from interest rate turbulence altogether until the markets calm down. Did 2013 provide a glimpse at the potential for a 2008-type scenario for bond markets? Many investors are aware of the 2008 global financial crisis, but paid little attention to 2013.
Fueled mostly by a short-lived fear of rising rates, 2013 was a hard year for domestic bonds, which delivered negative returns for the first time in more than a decade. How will the U.S. bond market react in the event of a prolonged period of increasing rates? 2013 Performance U.S.
Bonds -2.02% Nontraditional Bonds 7.16% Global Multi-Asset 9.07% Barclays U.S. Aggregate Bond Index PSAI Index (Long/Short Fixed Income) Dow Jones Global Composite Yield Index Past performance does not guarantee future results. Index returns assume reinvestment of dividends, but do not reflect any management fees, transaction costs or expenses. Indexes are generally unmanaged and are not available for direct investment. Summary: Fixed income investing makes sense for a lot of investors, and for many reasons.
But investors who primarily use bond funds for diversification, income or overall stability may want to take note of the interest rate environment. Interest rates are near all-time lows, and of course the future is unknown. What direction are rates going? Technically, they could still creep lower or remain relatively flat with the chance of being outpaced by inflation. But if rising rates are a primary concern, domestic bond fund investors may want to consider nontraditional bond strategies where the fund has the ability to adapt to changing markets.
For those with greater risk tolerance who are seeking diversification from other sources of return and higher yields, it may be wise to think globally and consider multiple asset classes beyond U.S. stocks and bonds. Past performance is not indicative of future returns. Historical data is used for illustration purposes only and should not be used as a predictive measure for the future return expectations of any investment.
The information is subject to change (based on market fluctuation and other conditions) and should not be construed as a recommendation of any specific security or investment product, and was prepared without regard for specific circumstances and objectives of any individual investor. Traditional, nontraditional, and alternative investments involve risks, including the potential for loss of principal. Nontraditional and alternative investments may involve additional risks, including, but not limited to, shorting risks, the use of leverage, the use of derivatives, futures market speculation and regulatory changes. Before investing in any financial product, always read the prospectus and/or offering memorandum for product-specific risks. Data sources: FactSet, Bloomberg. Index returns assume reinvestment of dividends, but do not reflect any management fees, transaction costs or expenses.
Indexes are generally unmanaged and are not available for direct investment. AD-050815 .
markets. If income is the primary focus, many regions around the world have higher prevailing market interest rates than the rates found within the U.S. fixed income markets. For investors who are more risk averse, there are ways to maintain exposure to fixed income without maintaining such a high level of interest rate sensitivity.
Many nontraditional bond funds have the ability to change course as the markets shift. A long/short bond fund can invest in bonds as rates are flat or falling, but have the ability to profit during rising rate environments by shorting bonds—i.e., taking the opposite side of the trade by investing against the bond market. Some nontraditional bond funds may also have the ability to put assets into cash and stay away from interest rate turbulence altogether until the markets calm down. Did 2013 provide a glimpse at the potential for a 2008-type scenario for bond markets? Many investors are aware of the 2008 global financial crisis, but paid little attention to 2013.
Fueled mostly by a short-lived fear of rising rates, 2013 was a hard year for domestic bonds, which delivered negative returns for the first time in more than a decade. How will the U.S. bond market react in the event of a prolonged period of increasing rates? 2013 Performance U.S.
Bonds -2.02% Nontraditional Bonds 7.16% Global Multi-Asset 9.07% Barclays U.S. Aggregate Bond Index PSAI Index (Long/Short Fixed Income) Dow Jones Global Composite Yield Index Past performance does not guarantee future results. Index returns assume reinvestment of dividends, but do not reflect any management fees, transaction costs or expenses. Indexes are generally unmanaged and are not available for direct investment. Summary: Fixed income investing makes sense for a lot of investors, and for many reasons.
But investors who primarily use bond funds for diversification, income or overall stability may want to take note of the interest rate environment. Interest rates are near all-time lows, and of course the future is unknown. What direction are rates going? Technically, they could still creep lower or remain relatively flat with the chance of being outpaced by inflation. But if rising rates are a primary concern, domestic bond fund investors may want to consider nontraditional bond strategies where the fund has the ability to adapt to changing markets.
For those with greater risk tolerance who are seeking diversification from other sources of return and higher yields, it may be wise to think globally and consider multiple asset classes beyond U.S. stocks and bonds. Past performance is not indicative of future returns. Historical data is used for illustration purposes only and should not be used as a predictive measure for the future return expectations of any investment.
The information is subject to change (based on market fluctuation and other conditions) and should not be construed as a recommendation of any specific security or investment product, and was prepared without regard for specific circumstances and objectives of any individual investor. Traditional, nontraditional, and alternative investments involve risks, including the potential for loss of principal. Nontraditional and alternative investments may involve additional risks, including, but not limited to, shorting risks, the use of leverage, the use of derivatives, futures market speculation and regulatory changes. Before investing in any financial product, always read the prospectus and/or offering memorandum for product-specific risks. Data sources: FactSet, Bloomberg. Index returns assume reinvestment of dividends, but do not reflect any management fees, transaction costs or expenses.
Indexes are generally unmanaged and are not available for direct investment. AD-050815 .
