THE CORE CONUNDRUM - Guggenheim Partners

PORTFOLIO STRATEGY RESEARCH | FEBRUARY 2013 

THE CORE CONUNDRUM 

As U.S. monetary policy continues to artificially depress yields on 

government-related securities, traditional core fixed-income strategies have 

proven less effective in achieving total return objectives. Compounding this 

issue is the flagship fixed-income benchmark, which has become heavily 

concentrated in government and agency debt. As benchmark yields languish 

around 1.9 percent, the chasm between investors’ return targets and current 

market realities deepens. 

Bridging this gap, without assuming undue credit or duration risk, requires 

a shift away from the traditional view of core fixed-income management 

in favor of a more diversified, multi-sector approach. An increased tolerance 

for tracking error provides the flexibility to increase allocations to undervalued 

yet high-quality credits across sectors. We believe this approach offers 

a more sustainable way to improve total risk-adjusted returns in today’s 

low-rate environment. 

1 | PORTFOLIO STRATEGY RESEARCH GUGGENHEIM PARTNERS

OVERVIEW 

Report Highlights 

• The combined impact of U.S. monetary and fiscal policy has created the core 

conundrum: How can core fixed-income investors meet their yield objectives 

while maintaining low tracking error to the Index, which has become approximately 

75 percent concentrated in low-yielding government-related debt? 

• The benign credit environment is encouraging investors to take investment 

shortcuts, such as increasing credit and duration risk, to generate yield. 

History has shown that the market has a tendency to underestimate these 

risks, particularly during periods of monetary policy accommodation. 

• In the current environment, we believe the surest path to underperformance 

is to remain anchored to the past. Investors must develop a new, sustainable, 

long-term strategy to generate yield without assuming excessive credit or 

duration risk. 

• Accessing short-duration, investment-grade quality securities with considerable 

yield pickup relative to government and corporate bonds may be the 

investment blueprint needed to navigate the current low-rate environment 

and hedge against interest rate risk. 

CONTENTS 

SECTION 1 3 

The Core Conundrum 

SECTION 2 7 

Coping with New Market Realities 

SECTION 3 10 

Future Investment Blueprint 

INVESTMENT PROFESSIONALS 

B. SCOTT MINERD 

Chief Investment Officer 

ERIC S. SILVERGOLD 

Senior Managing Director, 

Portfolio Manager 

KELECHI C. OGBUNAMIRI 

Associate, Investment Research 

ANNE B. WALSH, CFA 

Assistant Chief Investment Officer, 

Fixed Income 

JAMES W. MICHAL 

Director, Portfolio Manager 


SECTION 1 

The Core Conundrum 

In an environment where the benchmark index is heavily concentrated 

in low-yielding government and agency securities, maintaining low 

tracking error and pursuing total return targets have seemingly become 

contradictory objectives. In the following section, we will discuss how 

recent monetary and fiscal policy has created this conundrum for 

core fixed-income investors. 

Monetary Policy Distorting 

Government and Agency Markets 

Having reached the limits of conventional monetary 

policy, quantitative easing (QE) has become the 

preferred tool for U.S. central bankers to keep interest 

rates artificially low in hopes of stimulating the 

economy. Over the past five years, the total aggregate 

assets on the Federal Reserve’s balance sheet 

increased by a staggering 225 percent (compared 

to 22 percent over the previous five-year period). 

Recognizing that the Fed’s asset purchases are 

entirely policy-driven and contrary to natural 

market dynamics, investors should pause to fully 

appreciate the attendant implications. Whenever 

there is an uneconomic buyer making large-scale 

investment decisions irrespective of price, market 

distortions are inevitable. 

Artificially low yields have long been the case with 

Treasuries, and this distortion is increasingly true 

for agency mortgage-backed securities (MBS), 

which have been purchased at the rate of $40 billion 

per month since the start of QE3 in September 

2012. With the start of an additional $45 billion per 

month Treasury purchase program beginning in 

January 2013, and the Fed’s statement that highly 

accommodative monetary policy will continue 

at least until specific unemployment or inflation 

targets are reached, Treasury and agency MBS 

markets are likely to remain distorted throughout 

the next several years. Today, these overbought 

asset classes currently represent nearly 75 percent 

of the Barclays U.S. Aggregate Bond Index. 

3 | THE CORE CONUNDRUM GUGGENHEIM PARTNERS

The Impact of the Financial Crisis 

Rise in U.S. Treasury Debt Outstanding since the Financial Crisis 

$20Tn 

2001 – 2006 2007 – 2012 

46% 

162% 

projected 

68% 

$15Tn 

$10Tn 

$5Tn 

$0Tn 

1980 

1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2022 

As the U.S. government’s fiscal deficit soared from 1.3 percent of GDP in 2007 to 10.4 percent of GDP 

by 2009, the resulting impact was a significant rise in Treasury issuance. Treasury debt outstanding 

grew from $4.5 trillion in 2007 to $11.3 trillion by the end of 2012. The Congressional Budget Office 

(CBO) projects an additional 68 percent increase to $18.9 trillion over the next ten years. 

Source: SIFMA, Congressional Budget Office. Data as of 12/31/2012. 

The Evolution of the Core Fixed-Income Universe 

Reweighting of the Universe toward Risk-Free Assets 

19.0 % 

Treasuries 

Agency MBS 

Agency Bonds 

Investment-Grade Bonds 

Non-Agency MBS 

Taxable Municipals 

ABS 

34.5 % 

2007 

2012 

The massive increase in Treasury debt has reshaped the core fixed-income universe. Since bottoming in 

2007 at 19 percent of core bonds outstanding, Treasuries nearly doubled to 35 percent of the universe 

by 2012. Combined with agency debt, U.S. government assets now comprise almost two-thirds of the 

core fixed-income universe, and nearly 75 percent of the Barclays Agg. 

Source: SIFMA, Credit Suisse. Data as of 12/31/2012. 


Assessing the Relative Value of the Barclays Agg 

Historical Yield per Unit of Duration 

4% 

3% 

0.3 % 

12/31/2012 

2% 

1% 

0% 

1976 

1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 

Currently, the Barclays Agg is the least attractive it has ever been as measured by yield per unit 

of duration. Given the Fed’s recent pledge to keep rates low at least until specific unemployment 

or inflation targets are reached, the Index’s unattractiveness from an investment standpoint is 

likely to continue in the near term. Source: Barclays. Data as of 12/31/2012. 

Fiscal Policy Reconfiguring 

Composition of Barclays Agg 

Since its creation in 1986, the Barclays U.S. 

Aggregate Bond Index (the “Index” or the “Agg”) 

has become the most widely used proxy for the U.S. 

bond market with over $2 trillion in fixed-income 

assets managed to it. Inclusion in the Agg requires 

that securities be U.S. dollar-denominated, 

investment-grade rated, fixed-rate, taxable, and 

meet minimum par amounts outstanding. In 1986, 

the fixed-income landscape primarily consisted of 

U.S. Treasuries, agency bonds, agency MBS, and 

corporate bonds – all of which met these inclusion 

criteria. Therefore the Agg was a useful proxy for 

the universe of fixed-income assets. However, 

the fixed-income universe has evolved over the 

past twenty years with the growth of sectors 

such as asset-backed securities and municipals. 

Over the past five years, the composition of the 

Barclays Agg has been altered by the massive 

volume of Treasuries issued in response to the 

U.S. financial crisis. 

The sheer glut of Treasuries and their increasingly 

dominant representation in the Index is a trend 

unlikely to reverse anytime soon. The need 

to fund government shortfalls – present and 

future – is astonishing. The U.S. Treasury debt 


alance totaled $4.5 trillion in 2007. By the end 

of 2012, it had skyrocketed to $11.3 trillion. Yet, 

it is projected to go even higher – hitting $18.9 

trillion by 2022, according to estimates from the 

Congressional Budget Office. As Treasuries climbed 

from 19 percent of the core fixed-income universe 

to 35 percent over the last five years, the marketcapitalization 

weighted Agg has followed suit. 

Treasuries currently comprise 37 percent of the 

Agg, and combined with agency debt, total U.S. 

government-related debt comprises nearly 75 

percent of the Index with a weighted-average yield 

of 1.6 percent, as of January 31, 2013. 

Anchored to a benchmark heavily allocated to 

sectors yielding negative real rates of return 

has forced investors to reassess the traditional, 

benchmark-driven approach to core fixed-income 

management. While historically, core strategies 

have had negligible exposure to leveraged credit, 

emerging-market debt, and non-agency structured 

credit – all of which are typically higher yielding 

and commensurately, higher risk segments of the 

fixed-income universe – this aversion to riskier 

assets appears to be waning given the need for 

yield. In the next section, we will analyze the 

strategies being employed to generate yield, as 

investors adjust to new market realities. 

Scarcity of Yield across Fixed-Income Landscape 

Historically Low Yields across Traditional Core Sectors 

18% 

15% 

12% 

9% 

6% 

7.3% 

5.0% 

5.5% 5.5% 

8.0% 7.9% 

6.6% 

4.5% 

3% 

1.9% 

1.0% 

3.3% 

1.8% 

2.8% 

0.9% 

2.5% 

1.1% 

0% 

Sector 

Weight 

Barclays Agg 

100.0% 

ABS 

0.4% 

Municipals 

1.4% 

CMBS 

1.8% 

Corporates 

21.6% 

Treasuries 

36.6% 

Agency MBS 

29.4% 

Agency Bonds 

8.9% 

Historical High 

Historical Low 

Current 

Historical Average 

With the average yield of the Barclays Agg at 1.9 percent, and 75 percent of the Index allocated to 

Treasuries, agency MBS, and agency bonds, investors with minimum yield targets have nowhere 

to hide within the Index and benchmark-driven strategies may continue to fall short of the yield 

requirements for most institutional investors. Source: Barclays. Data as of 01/31/2013. 


SECTION 2 

Coping with New 

Market Realities 

As institutional investors evaluate their need to generate yield, a softening 

stance toward tracking error appears to be emerging, industry-wide. 

Traditional yield enhancement techniques, such as increasing duration 

and lowering credit quality, may boost total returns in the near term, 

but at what cost? Currently, benign credit conditions may be overshadowing 

the potentially deleterious, long-term effects of higher 

credit and interest rate risk. 

Prioritizing Yield Targets 

For investors who service their cash liabilities 

through the income stream generated from their 

bond portfolios, relative performance to an Index, 

that finished 2012 with a total return of 4.2 percent 

and a yield of 1.7 percent, is of secondary importance, 

and in some cases, inconsequential. For 

institutional investors, such as insurance companies, 

pension funds, and endowments, absolute yields 

and returns are preeminently important. While 

several prominent pension funds recently lowered 

portfolio return estimates by 25 to 50 basis points, 

these diminutive cuts appear largely symbolic 

in nature as they fail to address the investment 

shortfall concerns emanating from this persistent, 

low-rate environment. Despite historically low yields, 

materially lowering investment return targets is 

simply not a viable option for particular investor 

classes. As portfolio return targets remain unhinged 

from current market yields, many investors have 

begun assuming increased investment risks. 

Demand for yield has precipitated a relaxation 

in underwriting standards and eased the availability 

of credit. For example, during 2012, the 

investment-grade and high-yield bond markets 

set records for issuance. Particularly in the highyield 

market, there was a significant increase in 

deals lacking covenant protection; volume from 

lower-rated, first-time issuers; and aggressive deal 

structures. The negative, long-term impact of 

7 | COPING WITH NEW MARKET REALITIES GUGGENHEIM PARTNERS

10-Year Treasury Yield 

these worsening trends in new issuance is currently 

being obscured by the benign credit environment, 

a by-product of the Fed’s unprecedented monetary 

accommodation. As the Fed begins the fifth year of 

its zero-bound monetary policy, continued expectations 

for low rates would appear to mitigate the 

risk of extending duration in pursuit of incremental 

yield. However, using historical precedent as our 

guide, the market sometimes fails to effectively 

discount the potential for sudden monetary 

policy shifts. 

Asymmetric Risk in Treasuries 

During the 1940s, the Fed, acting in concert with 

the Treasury Department, fixed interest rates on 

short-term Treasury bills while committing to buy 

long-term Treasury bonds in order to ensure cheap, 

adequate financing for World War II and the 

attendant recovery. The end of this practice, under 

the Treasury Accord of 1951, led to a tumultuous 

sell-off in longer-duration bonds as the market 

failed to anticipate the shift in monetary policy. 

Once the Fed inevitably begins removing excess 

Historically, the End of Fed Intervention is Bad News for Bonds 

U.S. 10-Year Treasury Yields since 1800 

15% 

13% 

1 2 

Rate 

Stability 

Bear Market 

in Bonds 

11% 

9% 

7% 

5% 

3% 

Treasury Accord 

1% 

1800 1815 1830 1845 1860 1875 1890 1905 1920 1935 1950 1965 1980 1995 2010 

The removal of Fed support of bond prices at the long end of the curve in 1951 set off a bear market 

in bonds that lasted thirty years. Could history repeat itself once the current period of low rates ends? 

While we do not think this is imminently possible, future policy change is increasingly a concern. 

Source: Bloomberg. Data as of 12/31/2012. 


Nominal Total Return 

Era of “Return-Free Risk” 

U.S. 10-Year Treasury One-Year Holding Period Returns 

15% 

10% 

A 20 basis point move in 

rates wipes away the total 

return in 10-year Treasuries 

5% 

0% 

-150 -100 -50 0 100 150 200 

-5% 

-10% 

-15% 

-20% 

Change in Interest Rates (Basis Points) 

U.S. 10-Year Treasury One-Year Holding Period Total Returns 

Purchasing 10-year Treasuries at current yields comes with considerable duration risk. Today’s low 

coupon rates mean a 20 basis point rise in rates would lead to a negative total return over a one-year 

holding period. With the risk in Treasuries heavily skewed to the downside, we believe Treasuries have 

gone from offering “risk-free returns” to now effectively becoming “return-free risk.” Source: Bloomberg. 

Data as 12/31/2012. The total return scenario is calculated based on the coupon rate of 1.625% and an effective duration of 9.1. 

liquidity from the financial system, could a repeat 

of the 1950s occur? While we do not envision any 

sudden monetary policy shifts or a meaningful 

rise in rates in the near term, given where rates 

are today and how grossly overvalued Treasury 

securities have become, the risk to rates is clearly 

to the upside. At current coupon rates, a 20 basis 

point rise in rates would result in a negative total 

return on 10-year Treasuries over a one-year holding 

period. Based on the asymmetrical risk-return 

profile, we believe Treasuries have gone from 

offering “risk-free returns” to now effectively 

becoming “return-free risk.” 

The dearth of yield within traditional core fixedincome 

sectors has resulted in an uptick in tracking 

error as investors increase allocations to riskier 

investments, such as emerging-market bonds and 

high-yield debt. According to eVestment Alliance, 

the average tracking error for core fixed-income 

strategies rose to 1.09 percent over the past three 

years ending December 2012, compared to 0.66 

percent in the three-year period from 2005 to 2007. 

Given investors’ increased willingness to venture 

outside the traditional confines of core fixed-income, 

in the following section, we propose a more optimal 

method to generate attractive yields without 

sacrificing credit quality or extending duration. 


SECTION 3 

Future Investment Blueprint 

While it may seem that increased credit and duration risk have become 

prerequisites to generate yield, there is a more sustainable, long-term 

strategy that relies on the ability to uncover quality, investment-grade 

opportunities outside of the traditional benchmark-driven framework. 

Short-Duration Strategy 

Predicated on our view that the risk to interest rates 

is to the upside, we would advise investors to 

shorten portfolio duration and look for innovative 

ways to approach core fixed-income investing. 

Shortening duration offers a buffer against rising 

rates, but this generally comes at the expense 

of yield, particularly in corporate credit securities. 

The presumed positive correlation between yield 

and duration in the investment-grade universe has 

driven demand down the credit spectrum into 

lower-rated, high-yield bonds. A broader investment 

focus beyond the traditional core fixed-income 

framework demonstrates that lowering duration 

and producing attractive portfolio yields do 

not necessarily have to be mutually exclusive 

investment objectives. 

Within the investment-grade universe, floating-rate 

collateralized loan obligations (CLO) and shortduration 

asset-backed securities (ABS) offer similar 

yields to longer-dated corporate bonds with significantly 

less interest rate risk. While traditional 

securitizations of credit card receivables, student 

loans, and auto loans represent the majority of the 

ABS market, the sector has diversified into more 

specialized, niche segments of securities backed 

by various types of collateral, such as aircraft 

and shipping container leases, timeshare vacation 

ownership interests, and franchise fees. Largely 

owing to its association with the subprime crisis, 

these types of lesser-known, “orphan” credits suffer 

from a lingering negative connotation. The illiquidity 

and complexity of these non-traditional, “off-therun” 

sectors provide opportunities to generate yield 

in excess of comparably rated corporate credits. 

While corporate bond investors are exposed to the 

credit risk of a specific issuer or entity, idiosyncratic 

risks are mitigated in CLOs and ABS through large, 

diversified collateral pools. Additionally, these 

securities offer significant downside structural 

protection during stressed economic environments 

10 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS

through overcollateralization, excess spread, 

reserve accounts, and triggers that cut off cash 

flows to subordinated tranches. Lastly, the 

amortizing structures of many asset-backed 

securities reduce credit exposure over time, 

while risks remain constant in corporate bonds 

due to their bullet maturities. 

Monetizing Complexity 

Despite the generally positive credit fundamentals 

in traditional ABS sectors, low nominal yields 

decrease the attractiveness of these segments. 

These traditional sectors, which represent the 

lion’s share of the ABS exposure in the Barclays 

Agg, have a weighted-average yield of 1.0 percent. 

Yields on credit card ABS are currently below 

1 percent, while yields on auto loans are between 

1 and 2 percent. Although student loans offer 

slightly higher yields of 2 to 4 percent, the 

regulatory risk coupled with our belief that loan 

prepayments will be low, which would extend 

the average life of the securities to 10 to 15 years, 

significantly reduce their relative attractiveness. 

Relative Value of ABS and CLOs vs. Corporate Bonds 

Spread Comparison between BBB-AA-rated ABS, A-rated CLOs, and BBB-A-rated Corporates 

2,100bps 

1,800bps 

1,500bps 

1,200bps 

900bps 

600bps 

300bps 

0bps 

2002 2004 2006 2008 2010 

CLO 

ABS 

Corporate 

2012 

Largely owing to their association with the 

subprime crisis, CLOs and ABS frequently offer 

excess yield over corporate bonds given their 

increased complexity and illiquidity. 

Source: JP Morgan, Bank of America Merrill Lynch. Data as of 

12/31/2012. 

Spread High: Low: Avg: Last: 

CLO 2,070 68 460 315 

ABS 1,983 104 431 200 

Corporate 710 87 199 163 


Yield to Worst 

Discovering Yield in the Investment-Grade Universe 

New Issue, Esoteric ABS Provide Yield without Increased Credit and Rate Risk 

8% 

6% 

Barclays B 

Corporate Index 

(A S&P / A Fitch) 

Barclays BB 


4% 

(A S&P / A Fitch) 

2% 

BofA ML ABS 

Master BBB-AA Index 

Barclays U.S. Aggregate 

Bond Index (AA) 

Barclays AA 


Barclays BBB 


Barclays A 


0% 

2 3 4 5 6 7 8 

Duration 

In the investment-grade complex, ABS is one sector offering leveraged credit-type yields without the 

commensurate credit risk. Additionally, the shorter duration of ABS securities relative to comparably 

rated corporate bonds offers greater protection against rising rates. 

Source: Bloomberg, Bank of America Merrill Lynch, Barclays. Data as of 12/31/2012. Willis Lease is a U.S. public company and a major lessor 

of spare aircraft engines. BCP is a leading commercial bank in Peru. 

We believe CLOs and ABS backed by aircraft leases 

are the two sectors currently offering the most 

attractive relative value. CLOs are benefitting from 

low bank loan default rates, healthier corporate 

balance sheets, and robust new loan issuance 

(nearly $300 billion in 2012). In the aircraft ABS 

space, the recent wave of restructurings and 

recapitalizations of U.S. airlines have resulted 

in improved profitability and lower fixed costs. 

Leasing rates have been supported through the 

increased demand from airlines that have chosen 

to lease rather than buy aircraft. In addition to 

our favorable view on the underlying collateral, 

aircraft ABS securities tend to be amortizing, 

have shorter durations, and offer yields in excess 

of 6 percent on senior BBB tranches – a premium 

of almost 300 basis points over corporate bonds. 

Due to the immense diversity and complexity 

of CLOs and ABS, however, ascertaining relative 

value requires in-depth analysis of both deal 

structure and the underlying collateral. 

Long-Duration Strategy 

For investors who need to maintain longer asset 

duration in order to match their liabilities, floatingrate 

CLOs or short-duration ABS can be combined 

with longer-duration, fixed-rate securities as part 

of a barbell strategy. (“Barbell” means to structure 


Barbell means to structure a portfolio with both short- and long-duration 

securities in order to achieve a desired duration target. With a barbell strategy, 

the negative impact of rising rates on the longer-duration, fixed-rate assets 

is partially offset by the positive benefit of higher interest coupons on floatingrate 

securities. 

a portfolio with both short- and long-duration 

securities in order to achieve a desired duration 

target.) Utilizing this approach provides investors 

with yield advantages while still meeting portfolio 

duration objectives. With a barbell strategy, the 

negative impact of rising rates on the longerduration, 

fixed-rate assets is partially offset by 

the positive benefit of higher interest coupons 

on floating-rate CLOs. In the case of ABS, shorter 

maturities and principal amortizations allow 

investors to reinvest proceeds at higher yields 

if rates were to rise over an extended period. 

To complement the short duration of ABS in the 

barbell strategy, we prefer select, longer-dated, 

taxable municipal bonds that offer yield premium 

to Treasuries and agency debt. The political 

uncertainty over the past several years, namely 

the debt ceiling debate and the Fiscal Cliff, has 

created attractive valuations in the municipal 

market. As investors begin focusing on the real 

economy and not the political economy, we believe 

municipals are primed to benefit. According to 

the Rockefeller Institute, state tax revenues have 

grown for 10 consecutive quarters as employment 

at the state and local government level has stabilized. 

California, once the poster child for fiscal ineptitude, 

is projecting an $850 million budget surplus for 

full year 2014. A longer-term tailwind for municipal 

credit fundamentals will be the continued 

momentum of the housing sector. Home price 

appreciation will eventually translate into higher 

property tax assessments realized by local governments 

over the next several years. 

Aside from these improving fundamental factors, 

the municipal sector may also benefit from technical 

catalysts. Building upon the record $50 billion in 

mutual fund inflows in 2012, continued demand 

for municipals will likely be aided by the expected 

growth of the U.S. economy throughout 2013. 

Increased Federal revenues may lead to a decline 

in Treasury bond issuance, forcing investors into 

other government-related alternatives such as 

municipals and military housing. Our focus remains 

on A-rated revenue bonds maturing within 20 years 

that finance essential services, public universities 

and transportation. 

Active Management in Practice 

With nominal coupons across the fixed-income 

universe near historical lows, the opportunity cost 

from employing a benchmark-driven, passively 

managed strategy has increased dramatically. An 

actively managed strategy provides the opportunity 

to generate returns through targeted weightings 

to attractively valued sectors. The volatility of sector 

performance over the past few years, quantified 

in the following table, underscores the importance 

of active management. 


The Future of Core Fixed-Income 

The traditional view of core fixed-income did not 

include active duration management, increased 

tolerance for tracking error, or significant allocations 

to non-indexed sectors such as floating-rate CLOs 

and “off-the-run” ABS. As the chasm between 

investors’ return targets and current market yields 

deepens, it is apparent that the traditional view of 

core fixed-income management requires innovation. 

The historically low-rate environment has intensified 

the demand for absolute yield, antiquating investors’ 

historical focus on relative performance. 

In pursuing yield targets, investors must not allow 

short-term pursuits to derail long-term investment 

objectives. We believe the global easing cycle will 

continue to support a benign credit environment 

over the next two to three years; however, the current 

accommodative conditions are likely masking a 

comprehensive appreciation of investment risks. 

Asset Allocation Matters, Particularly in Today’s Low Yield Environment 

Historical Annual Fixed-Income Sector Returns 

2006 2007 2008 2009 2010 2011 2012 

High Yield Treasuries Treasuries High Yield High Yield Municipals High Yield 

11.8 % 9.0 % 13.7 % 58.2 % 15.1 % 18.1 % 15.8 % 

Leveraged Loans Municipals Municipals Leveraged Loans Leveraged Loans Treasuries IG Corporates 

7.3 % 7.6 % 7.0 % 44.9 % 10.0 % 9.8 % 9.8 % 

ABS IG Corporates IG Corporates ABS IG Corporates IG Corporates Municipals 

4.7 % 4.6 % -4.9 % 24.7 % 9.0 % 8.1 % 9.6 % 

IG Corporates ABS 

ABS IG Corporates Municipals 

ABS Leveraged Loans 

4.3 % 2.2 % -12.7 % 18.7 % 7.2 % 5.1 % 9.4 % 

Municipals 

3.2 % Leveraged Loans 

1.9 % High Yield 

-26.2 % Municipals 

0.7 % Treasuries 


5.0 % ABS 

3.7 % 

Treasuries 



-28.8 % Treasuries 

-3.6 % ABS 


1.8 % Treasuries 

2.0 % 

With nominal yields near historical lows, price performance is likely to become a larger component 

of total returns in the near term. Active asset allocation provides the opportunity for a portfolio to 

generate returns through increased weightings to attractively valued sectors and decreased weightings 

to overvalued asset classes. Source: Barclays, Credit Suisse. Data as of 12/31/2012. 


The Changing of the Guard 

The Future of Core Fixed-Income Management 

Traditional View: Barclays Agg 

WEIGHT 

YIELD 

74.7 % 

gov.-related debt 

U.S. Treasuries 

Agency MBS 

Agency Bonds 

Corporates 

RMBS n/a 

CMBS 


ABS 

Weighted-Average Yield 

0% 

0.9% U.S. Treasuries 

1.0% 

0.9% 

1.3% 

1.7% 

1.7% 

2.2% 

2.7% 

3.2% 

Agency MBS 

Agency Bonds 

Corporates 

RMBS 

CMBS 


ABS 


1% 2% 3% 4% 5% 0% 1% 

U.S. Treasuries WEIGHT 

Agency MBS 

U.S. Agency Treasuries Bonds 

Agency Corporates MBS 

Agency Bonds RMBS 

Corporates CMBS 

Taxable Municipals RMBS n/a 3.2% Taxable Municipals RMBS 

4.8% 5.0% 

CMBS ABS 

Weighted-Average Taxable Municipals Yield 

ABS 0% 


Future View: Guggenheim Core Fixed-Income 

0% 

0.9% U.S. YIELD Treasuries 

1.0% 

2.2% Agency MBS 

2.3% 

0.9% 1.3% U.S. Agency Treasuries Bonds 

1.0% 

2.3% 

2.2% 2.7% Agency Corporates MBS 

4.2% 

gov.-related debt 

2.3% 

n/a 1.3% Agency Bonds RMBS 

2.3% 

5.0% 

1.7% 

16.6 % 

2.7% Corporates CMBS 

4.2% 4.7% 

0.9% 1.7% 

CMBS ABS 

4.7% 4.9% 

1.7% 3.2% Weighted-Average Taxable Municipals Yield 

4.2% 4.8% 

1% 0.9% 2% 3% 4% 5% ABS 0% 1% 2% 3% 4% 5% 4.9% 

1.7% 


4.2% 

1% 2% 3% 4% 5% 0% 1% 2% 3% 4% 5% 

With the traditional view of core fixed-income management quickly becoming antiquated in today’s 

U.S. Treasuries 

1.0% 

low-yield environment, investors must begin looking forward towards the future of core fixed-income 

2.2% Agency MBS 

2.3% 

management. Source: Barclays, Guggenheim Investments. Data as of 12/31/2012. Sector allocations are based on the representative 

Agency Bonds 

2.3% 

account of the Guggenheim Core Fixed-Income Strategy and excludes cash. 

2.7% Corporates 

4.2% 

% 

RMBS 

CMBS 

5.0% 

4.7% 

3.2% Taxable Municipals 

4.8% 

% 

ABS 

Given the overwhelming emphasis on total return, 


4.2% 

3% 4% 5% 1% 2% 3% 4% 5% 

investors must be vigilant 0% in identifying the risks 

By remaining tightly aligned to the Barclays Agg, 

which is currently bloated with low-yielding 

involved in reaching for incremental yield, since government-related debt, investors are giving up 

“not all yield is created equal.” Employing investment the flexibility to take advantage of undervalued 

shortcuts, such as increased credit or interest sectors and underweight unattractive ones. In 

rate risk, solely to generate yield may come at the a market coping with unprecedented monetary 

expense of future performance. Achieving yield conditions, we believe the surest path to underperformance 

is to remain anchored to outdated core 

targets without assuming undue risk has proven 

extremely difficult under the traditional framework. fixed-income conventions of the past. 

We believe it is achievable under a broadened 

investment framework. 

4.9% 


About Guggenheim Partners 

Guggenheim Partners is a privately held financial services firm that provides asset management, investment 

banking, and insurance solutions. At Guggenheim Partners, we combine innovative thinking and experienced 

advice to sophisticated clients. Our primary businesses include: 

INVESTMENTS 

Fixed Income 

Equities 

Alternatives 

Managed Account Platform 

Asset Allocation 

SECURITIES 

Advisory 

Financing 

Sales and Trading 

Research 

INSURANCE 

Life and Annuity 

Capital Solutions 

Wealth Protection 

About Guggenheim Investments 

Guggenheim Investments represents the investment management division of Guggenheim Partners, which 

consist of investment managers with approximately $143 billion in combined total assets. 1 Collectively, 

Guggenheim Investments has a long, distinguished history of serving institutional investors, ultra-high-networth 

individuals, family offices, and financial intermediaries. Guggenheim Investments offers clients a wide 

range of differentiated capabilities built on a proven commitment to investment excellence. Guggenheim 

Investments has offices in Chicago, New York City, and Santa Monica, along with a global network of offices 

throughout the United States, Europe, and Asia. 

NEW YORK 

135 E 57th St | 10022 

212 739 0700 

CHICAGO 

227 W Monroe St | 60606 

312 827 0100 

SANTA MONICA 

100 Wilshire Blvd | 90401 

310 576 1270 

LONDON 

5 Wilton Road | SWIV 1AN 

+44 207 052-8272 

1 

Assets Under Management(AUM) is as of 12.31.2012 and includes $10.71B of leverage. AUM includes assets from Security Investors, Guggenheim Partners Investment 

Management, LLC (“GPIM”, formerly known as Guggenheim Partners Asset Management, LLC; GPIM assets also include all assets from Guggenheim Investment Management, 

LLC which were transferred as of 06.30.2012), Guggenheim Funds Investment Advisors and its affiliated entities, and some business units including Guggenheim Real Estate, 

Guggenheim Aviation, GS GAMMA Advisors, Guggenheim Partners Europe, Transparent Value Advisors, and Guggenheim Partners India Management. Values from some funds 

are based upon prior periods. 

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC (“GP”): GS GAMMA Advisors, LLC, Guggenheim 

Aviation, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Investment Management, LLC, Guggenheim Partners Europe 

Limited, Guggenheim Partners India Management, Guggenheim Real Estate, LLC, Security Investors, LLC and Transparent Value Advisors, LLC. Guggenheim Partners Investment 

Management, LLC (GPIM) is a registered investment adviser and serves as the adviser to the Core Fixed Income Strategy. GPIM is included in the GIPS compliant firm, Guggenheim 

Investments Asset Management, and is also a part of Guggenheim Investments. This material is intended to inform you of services available through Guggenheim Investments’ 

affiliate businesses. 

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment 

product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without 

notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information 

contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. 

Past performance of indices of asset classes does not represent actual returns or volatility of actual accounts or investment managers, and should not be viewed as indicative of 

future results. The benchmarks used are for purposes of comparison and should not be understood to mean that there will necessarily be a correlation between the portrayed returns 

herein and these benchmarks. 

Past performance is not indicative of comparable future results. Given the inherent volatility of the securities markets, it should not be assumed that investors will experience returns 

comparable to those shown here. Market and economic conditions may change in the future producing materially different results than those shown here. All investments have 

inherent risks. 

No representation or warranty is made to the sufficiency, relevance, importance, appropriateness, completeness, or comprehensiveness of the market data, information or 

summaries contained herein for any specific purpose. 

© 2013 Guggenheim Partners LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of 

Guggenheim Partners LLC.

THE CORE CONUNDRUM - Guggenheim Partners

Create successful ePaper yourself

Delete template?

Save as template?