July 09, 2018
Solving the Core Conundrum: A Strategy to Generate Income and Enhance Risk-Adjusted Returns in a Low-Rate Environment
NEW YORK – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today released the 2018 edition of The Core Conundrum, which details the Guggenheim approach to investing in fixed-income markets that have been distorted by central bank policies and a benchmark that is skewed toward government-related securities.
“The dominance of low-yielding Treasury and Agency securities in the Bloomberg Barclays U.S. Aggregate Bond index presents an investment conundrum: How can core fixed-income investors meet their total return objectives without taking on undue credit or duration risk?” say the report’s authors, led by Scott Minerd, Chairman of Investments and Global Chief Investment Officer.
“In our view, the answer lies in a more diversified, multi-sector approach to core fixed-income management. Specifically, investors may find better value in fixed-income sectors that are not represented in the Bloomberg Barclays U.S. Aggregate Bond index, such as commercial asset-backed securities and collateralized loan obligations.”
With this 2018 update, we also release timely and relevant video commentary in which Anne Walsh, Chief Investment Officer for Fixed Income, discusses why we believe investing in sectors not included in the Agg is the key to generating income and enhanced risk-adjusted returns in today’s low-rate markets.
Among the highlights in the 20-page report:
- Low interest rates and a benign credit environment have encouraged some investors to reach for yield by increasing duration risk, credit risk, or both.
- Investors may be underestimating the risks posed by these investment shortcuts, particularly as U.S. monetary policy tightens and the end of the credit cycle approaches.
- Most core investors benchmark to the Bloomberg Barclays U.S. Aggregate Bond index, which is dominated by low-yielding government-related securities. At $19 trillion, the Bloomberg Barclays U.S. Aggregate Bond index represents less than half of the total U.S. fixed-income universe, leaving out $21 trillion of non-indexed securities.
- Achieving yield targets while maintaining a high-quality portfolio is possible, but requires a willingness to look beyond the benchmark.
- The group of securities not included or underrepresented in the benchmark index includes commercial asset-backed securities and collateralized loan obligations, which may offer comparable or higher yields and lower durations than similarly rated corporate bonds.
- For investors with longer duration targets, a barbell approach that combines short-maturity, floating-rate credit, and long-duration, fixed-rate bonds may offer some protection against rising rates while meeting their yield and duration targets.
For more information, please visit www.guggenheiminvestments.com.
About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $246 billion¹ in total assets across fixed income, equity, and alternative strategies. We focus on the return and risk needs of insurance companies, corporate and public pension funds, sovereign wealth funds, endowments and foundations, consultants, wealth managers, and high-net-worth investors. Our 300+ investment professionals perform rigorous research to understand market trends and identify undervalued opportunities in areas that are often complex and underfollowed. This approach to investment management has enabled us to deliver innovative strategies providing diversification opportunities and attractive long-term results.
1Guggenheim Investments assets under management are as of 3.31.2018 and include leverage of $12.2bn. In April 2018, Guggenheim Investments closed the sale of the firm’s Exchange Traded Fund (“ETF”) business representing $38.6bn in assets under management, which will be reflected in the June 30, 2018 assets under management. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.
Investing involves risk, including the possible loss of principal. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their value to decline. • High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility.
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