THE CORE CONUNDRUM - Guggenheim Partners
THE CORE CONUNDRUM - Guggenheim Partners THE CORE CONUNDRUM - Guggenheim Partners
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 5.9 % High Yield 5.0 % ABS 3.7 % Treasuries 3.1 % High Yield 1.9 % Leveraged Loans -28.8 % Treasuries -3.6 % ABS 5.9 % Leveraged Loans 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. 14 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS
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 Taxable Municipals 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 Taxable Municipals ABS Weighted-Average Yield 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% Weighted-Average Yield 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% Weighted-Average Yield 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, Weighted-Average Yield 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% 15 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS
- Page 1 and 2: PORTFOLIO STRATEGY RESEARCH | FEBRU
- Page 3 and 4: SECTION 1 The Core Conundrum In an
- Page 5 and 6: Assessing the Relative Value of the
- Page 7 and 8: SECTION 2 Coping with New Market Re
- Page 9 and 10: Nominal Total Return Era of “Retu
- Page 11 and 12: through overcollateralization, exce
- Page 13: Barbell means to structure a portfo
The Future of Core Fixed-Income<br />
The traditional view of core fixed-income did not<br />
include active duration management, increased<br />
tolerance for tracking error, or significant allocations<br />
to non-indexed sectors such as floating-rate CLOs<br />
and “off-the-run” ABS. As the chasm between<br />
investors’ return targets and current market yields<br />
deepens, it is apparent that the traditional view of<br />
core fixed-income management requires innovation.<br />
The historically low-rate environment has intensified<br />
the demand for absolute yield, antiquating investors’<br />
historical focus on relative performance.<br />
In pursuing yield targets, investors must not allow<br />
short-term pursuits to derail long-term investment<br />
objectives. We believe the global easing cycle will<br />
continue to support a benign credit environment<br />
over the next two to three years; however, the current<br />
accommodative conditions are likely masking a<br />
comprehensive appreciation of investment risks.<br />
Asset Allocation Matters, Particularly in Today’s Low Yield Environment<br />
Historical Annual Fixed-Income Sector Returns<br />
2006 2007 2008 2009 2010 2011 2012<br />
High Yield Treasuries Treasuries High Yield High Yield Municipals High Yield<br />
11.8 % 9.0 % 13.7 % 58.2 % 15.1 % 18.1 % 15.8 %<br />
Leveraged Loans Municipals Municipals Leveraged Loans Leveraged Loans Treasuries IG Corporates<br />
7.3 % 7.6 % 7.0 % 44.9 % 10.0 % 9.8 % 9.8 %<br />
ABS IG Corporates IG Corporates ABS IG Corporates IG Corporates Municipals<br />
4.7 % 4.6 % -4.9 % 24.7 % 9.0 % 8.1 % 9.6 %<br />
IG Corporates ABS<br />
ABS IG Corporates Municipals<br />
ABS Leveraged Loans<br />
4.3 % 2.2 % -12.7 % 18.7 % 7.2 % 5.1 % 9.4 %<br />
Municipals<br />
3.2 % Leveraged Loans<br />
1.9 % High Yield<br />
-26.2 % Municipals<br />
0.7 % Treasuries<br />
5.9 % High Yield<br />
5.0 % ABS<br />
3.7 %<br />
Treasuries<br />
3.1 % High Yield<br />
1.9 % Leveraged Loans<br />
-28.8 % Treasuries<br />
-3.6 % ABS<br />
5.9 % Leveraged Loans<br />
1.8 % Treasuries<br />
2.0 %<br />
With nominal yields near historical lows, price performance is likely to become a larger component<br />
of total returns in the near term. Active asset allocation provides the opportunity for a portfolio to<br />
generate returns through increased weightings to attractively valued sectors and decreased weightings<br />
to overvalued asset classes. Source: Barclays, Credit Suisse. Data as of 12/31/2012.<br />
14 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS
Change language