The Importance of Diversifying Your Fixed Income Exposure
Why Traditional Fixed Income Alone May No Longer Be Enough

Key Takeaways

  • Historically, traditional fixed income has acted as a counterbalance to equity exposure. This relationship broke down in 2018 for the first time in the history of the Barclay’s Agg Index going back to 1976.
  • Many bond portfolios are under-exposed to the broader fixed income universe. This is problematic as it could lead to a lack of diversification, which could result in higher risk and lower overall returns for investors.
  • We believe non-traditional strategies in often overlooked segments of RMBS, ABS, and securitized markets, are wellpositioned to avoid duration risk and perform well in this type of environment.

For several decades, traditional fixed income products have performed well and acted as a counterbalance to equity portfolio exposure. Historically, during down or flat years for bonds, equities were up, thus balancing investors’ overall portfolios. However, this relationship broke down in 2018 for the first time in the history of the Barclay’s Agg Index going back to 1976, where bonds were mostly flat, and equities and many categories had negative returns.

For the first time, we are in a post-quantitative easing environment, and we believe this is causing the breakdown of this relationship between traditional bonds and equities. There is now limited buffer for the Fed to lower rates. Furthermore, market turmoil could be caused by rates continuing to rise, meaning both traditional bonds and equities could decline together. One way for investors to mitigate some of this duration risk is to diversify their fixed income exposure with non-traditional fixed income funds to help them achieve their long-term investment goals. We believe non-traditional strategies in often overlooked segments of residential mortgage backed securities (RMBS), asset backed securities (ABS), and securitized markets, are well-positioned to avoid duration risk and perform well in this type of environment.

Historically, traditional fixed income has acted as a counterbalance to equity exposure. During 2018, this was not the case as traditional bonds were mostly flat and equities were down.

During Most Periods, When Traditional Bonds Performed Poorly, Equities Performed Well and Vice Versa
Based on data from January 1976 to December 2018.

Barclays Agg Return Range Barclays Agg Average S&P 500 TR Index Average
Less than -1% -2.47% 16.85%
-1% to 1% -0.09% 6.01%
1% to 5% 3.65% 16.63%
5% to 10% 7.62% 7.54%
10% to 15% 12.14% 0.16%
Greater than 15% 17.24% 34.02%
Barclays Agg Return Range Barclays Agg Average S&P 500 TR Index Average
Less than -30% -37.00% 5.24%
-15% to -30% -22.10% 10.25%
-5% to -15% -10.50% 10.04%
-5% to 5% 0.37% 2.81%
5% to 15% 9.95% 6.18%
15% to 30% 24.95% 4.46%
Greater than 15% 33.10% 11.33%

For The First Time Since 1976, Bonds and Equities Did Not Counterbalance Each Other
Based on data from January 1976 to December 2018.

Source: Bloomberg. The referenced indices are shown for general market comparisons and are not meant to represent any fund. Investors cannot directly invest in an index; unmanaged index returns do not reflect any fees, expenses or sales charges.

Barclays Agg S&P 500 TR Index
1994 -2.92% 1.32%
1999 -0.82% 21.04%
2013 -2.02% 32.39%
2015 0.55% 1.38%
2018 0.01% -4.38%
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4539-NLD-4/11/2019