Living in a More Volatile Investment World - Pioneer Investments

Blue
pAPER
Living in a More
Volatile Investment
World
IN BRIEF
November 2012
Higher Market Volatility a Paradigm Shift
We believe that investors face a more volatile
investment environment that will demand
different ways of managing risk.
Pioneer Offers an Approach to Managing
Volatility in Client Portfolios
Income-oriented, multi-asset/multi-sector,
managed volatility strategies.

BLUE PAPER | Living in a More Volatile Investment World November 2012
Key Points
Financial markets have undergone a dramatic paradigm shift characterized by extreme
volatility. We believe this new paradigm will persist while the developed world de-levers,
a process that will take time.
Michael Temple
Senior Vice President,
Director of Credit Research
Volatility and Central Bank distortions have dramatically increased correlations between
financial markets. Increased volatility and correlations are self-reinforcing. This
phenomenon makes it difficult to achieve meaningful diversification through traditional
asset allocation.
We believe this more volatile investment environment demands different ways of
managing risk.
Our focus at Pioneer has been on creating income-oriented, multi-asset/sector strategies
that seek to achieve high and consistent returns by taking a balanced approach between
sophisticated asset allocation and thoughtful hedging.
Contributor
Michael Temple is Senior Vice President and Director of Credit Research, U.S., based in
Boston. He is responsible for oversight of Pioneer’s U.S. credit research department. His
duties include independent research of credits, sector analysis, and coordination of research
efforts in high yield, bank loan, investment grade, emerging markets and municipal credit. He
has been the Portfolio Manager of an institutional “Credit Opportunity” strategy since 2008,
and is also a Portfolio Manager of Pioneer Absolute Return Credit Fund. He received a BA and
MBA from the University of Colorado in 1982 and 1984, respectively.
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BLUE PAPER | Living in a More Volatile Investment World November 2012
Living in a More Volatile Investment World
A paradigm shift in financial
markets has taken place since
2008 into a more volatile
investment environment that
will demand different ways
of managing risk.
A paradigm shift in financial markets has taken place since 2008 into a more volatile
investment environment that will demand different ways of managing risk. In this
paper we will examine the forces behind the evolution to this new paradigm and
describe how investors might navigate this more volatile investment climate.
The following graph goes back to the 1930s, highlighting the deleveraging period after
the great Depression and WWII and then the “great moderation” after 1982. Notice the
greater frequency of recessions in the last deleveraging phase, when individuals,
companies and the government were actively reducing their debt loads, vs. the relative
calm and length of expansions in the re-leveraging phase from 1982 to 2008. Also
interesting to note are the prevalent spikes in volatility during those times.
120
Recessions Shorter/Expansions Longer in the Era of Re-Leveraging
S&P 500 1-month Annualized
Historical Volatility %
100
80
60
40
20
Recession Frequency Greater
Economic Expansion Periods Shorter
Grey area = Recession
Recession Frequency Less
Economic Expansion Periods Longer
0
Jan-28 Jan-33 Jan-38 Jan-43 Jan-48 Jan-53 Jan-58 Jan-63 Jan-68 Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08
The Last Deleveraging Phase
The Re-leveraging Era "The Great Moderation"
Source: Bloomberg. Last data point 7/31/2012.
Notice the greater frequency
of recessions in the last
deleveraging phase, when
individuals, companies and
the government were actively
reducing their debt loads
vs. the relative calm and
length of expansions in the
re-leveraging phase from
1982 to 2008.
Today, the question for many economists is, Will the next decade resemble the 1930s-40s
or the 1980s-2000s? Conditions today are different than in either period. In the 30s and
40s, a combination of high corporate leverage and high government leverage was a
poisonous backdrop that caused more frequent recessions and periods of market
instability. At least today, we have more sustainable corporate balance sheets. The
problem is, we still have higher-than-desired consumer debt loads. Developed-world
government debt balances are also unsustainably high. Thus, as we are now in a
deleveraging phase, it is not too much of a stretch to imagine that the next decade will
look more like the early part of the last century, rather than the latter part.
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BLUE PAPER | Living in a More Volatile Investment World November 2012
It is ironic, but we believe
that today’s higher
investment volatility is the
consequence of attempts by
central banks to engineer
a less volatile economic
environment.
Lower Volatility Sows the Seeds of Higher Volatility
It is ironic, but we believe that today’s higher investment volatility is the consequence of
attempts by central banks to engineer a less volatile economic environment. This
environment, one in which recessions are shorter/shallower and expansions stronger/
longer, has its roots in the early 1980s and has spanned over two decades. Dubbed “the
Great Moderation,” the period commenced with the resetting of inflation expectations
by Fed Chairman Volker. This psychological watershed was backstopped by the
globalization trend which helped defuse inflationary influences (as overseas capacity
robbed firms of pricing power, acting as a “relief valve” for domestic price pressures).
The decline in inflation and inflation volatility helped support a prolonged decline in
interest rates.
Lower Perceived Riskiness and the “Paradox
of Credibility”
Improved corporate balance sheets, more transparent monetary policy, and new “riskdiversifying”
financial instruments also lowered the perceived riskiness of investing in
securities tied to economic growth. Unfortunately, the stable macroeconomic
environment and strong central bank credibility created a false sense of security.
Hyman Minsky dubbed this the “paradox of credibility.” The Great Moderation era led
to excessive credit expansion and an underpricing of risk. Valuation bubbles and excess
debt were the consequence, manifesting three times since the early 1990s in both the
U.S. equity and two real-estate busts.
To combat the economic
aftereffects of burst bubbles,
the Federal Reserve (“Fed”)
aggressively reduced
interest rates. But because
of increasing systematic
leverage, rates had to be
lowered further in each cycle,
kept lower for longer, and
raised less each time before
the economy tipped back
into recession.
Percent
To combat the economic aftereffects of burst bubbles, the Federal Reserve (“Fed”)
aggressively reduced interest rates. But because of increasing systematic leverage, rates
had to be lowered further in each cycle, kept lower for longer, and raised less each time
before the economy tipped back into recession. In the graph below, you can see the
increase in leverage and the path of lower highs and lower lows in interest rates. The
story in Europe and Japan is similar.
20
18
16
14
12
10
8
6
4
2
0
Systematic Lowering of Interest Rates / Systematic Increasing of Leverage
Fed Funds Rate vs. Government Debt % of GDP
Systematic lowering of interest rates
Systematic increasing leverage
Zero Interest
rate boundary
Sep-80 Sep-83 Sep-86 Sep-89 Sep-92 Sep-95 Sep-98 Sep-01 Sep-04 Sep-07 Sep-11
Fed Funds Rate (left scale) U.S. Govt Debt % of GDP (right scale)
0.25
100
90
80
70
60
50
40
Percent
Fed Funds Rate last data point 8/31/2012. Government Debt as a % of GDP last data point 8/31/2012.
Source: Bloomberg
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BLUE PAPER | Living in a More Volatile Investment World November 2012
Today, we are effectively
at the zero interest rate
boundary, where we have
remained for almost
four years.
Today, we are effectively at the zero interest rate boundary, where we have remained for
almost four years. At this point, the only policies left to the Fed, the European Central
Bank (ECB) and the Bank of Japan (BOJ) are unconventional, and it is unclear whether
they will have much of an effect on their respective economies. Indeed, HSBC recently
investigated the effectiveness of each of the quantitative easing programs initiated by
the Fed and concluded that the programs were exhibiting signs of diminishing returns.
If central banks in the developed world are becoming less effective stewards of the
business, interest rate and credit cycles, it is likely we are going to experience more
frequent economic volatility; more “soft patches,” shorter and less robust expansions
and prolonged recessions.
Volatility by Asset Class
While volatility has broadly impacted the overall investment environment, each asset
class has exhibited its own unique responses:
• Fixed Income – Volatility in fixed income markets has become magnified since the
GFC. In the following chart we calculate the implied volatility of Treasuries, which
have been less anchored by the Fed Funds rate. The dotted red line marks the advent of
the GFC.
If central banks in the
developed world are
becoming less effective
stewards of the business,
interest rate and credit
cycles, it is likely that we are
going to experience more
frequent economic volatility;
more “soft patches,” shorter
and less robust expansions
and prolonged recessions.
Percent
Percent
300
250
200
150
100
50
0
Treasuries Less Anchored by Fed Funds Rate Activity
Volatility of Treasuries
Sep-95 Sep-97 Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 Sep-09
ML BofA Option Volatility MOVE Index, a yield curve weighted index of implied volatility on 1-month Treasury options and
the weighted average of volatilities on 2-, 5-, 10-, and 30-year Treasuries. Source Bloomberg. Last data point 7/31/12.
Volatility in the high yield market has also risen over the last 4 years, creating difficult
conditions for managers that are focused on providing steady income and returns.
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Sep-11
Jan-12
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BLUE PAPER | Living in a More Volatile Investment World November 2012
Volatility in the high yield
market has also risen over
the last 4 years, creating
difficult conditions for
managers that are focused
on providing steady income
and returns.
Percent
HY Realized Vol
High Yield Bonds Have Been More Volatile
30
Volatility of High Yield Bonds
25
20
15
10
5
0
Sep-90 Sep-93 Sep-96 Sep-99 Sep-02 Sep-05 Sep-08 Sep-11
Source: BofA High Yield Master II Index which measures the performance of below investment grade U.S. bonds, source
Bloomberg. Last data point 7/31/2012.
• Currencies – Foreign Exchange (“FX”) volatilities (Vols) remain elevated post 2008.
Following the GFC, the volatility of the world‘s 10 major (G10) currencies spiked
from a long-term average of around 9.5% to 20% in 2009, and since then has been
widely fluctuating between 12-16%.
The FX Vol curve remains
near historic steepness.
Since the GFC, the FX Vol
curve is also near record
steepness - likely a reflection
of demand for tail-risk
protection as hedgers buy
longer-dated options,
supporting a risk premium
in the term structure.
Since the GFC, the FX Vol curve is also near record steepness - likely a reflection of
demand for tail-risk protection as hedgers buy longer-dated options, supporting a risk
premium in the term structure. The FX Vol curve also indicates a pickup in volatility
in the coming weeks to months. This could be interpreted that FX markets are
expecting low volatility in the short term but a significant increase in volatility in the
second half of 2012.
25
Currency Volatility Spiked in 2008 and Remains Elevated - Likely Reflecting
Hedging Activity
20
Average 1-year Implied Volatility of G10 Currencies
Percent
15
10
5
0
Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11
Source: Bloomberg and Pioneer Investments. Last data point 7/13/2012.
• Equities – For many investors the term “risk assets” is synonymous with common
stocks. During periods of economic distress, equities exhibit sharply elevated levels of
volatility as investors seek refuge in senior claims (bonds), cash or government debt.
The chart below illustrates this trend.
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BLUE PAPER | Living in a More Volatile Investment World November 2012
During periods of economic
distress, equities exhibit
sharply elevated levels of
volatility as investors seek
refuge in senior claims
(bonds), cash or
government debt. The
chart below illustrates
this trend.
Percent
Percent
80
70
60
50
40
30
20
10
0
Equity Volatility During Economic Distress
S&P Implied Volatility (90 Day)
S&P Historical Volatility (90 Day)
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Source: Bloomberg. Last data point 9/28/2012.
Virtually all commoditylinked
fund products and
derivatives have launched
in the last five years, and
their effect is palpable.
Correlations with equity
markets are now ~ 60%,
compared to ~0% prior to
this era.
The consequence of this behavior has been skepticism over whether the stock market
appropriately compensates investors for the increase in volatility and its impact on
portfolios.
• Commodities – Over the last decade, commodities have undergone a dramatic
structural change. The proliferation of commodity-linked exchange-traded funds
and more robust futures markets has transformed this asset class. They are no longer
simply used to mitigate price risk for crops and raw materials, but have “morphed”
into complex financial instruments that are open to speculative trading. A consequence
of this transition has been the substantial increase in volatility, as well as a rise in
correlation with other risk asset classes — which has reduced their effectiveness as
portfolio diversifiers. The chart below illustrates this.
Commodities Have “Morphed” into Instruments Open to Speculative Trading
Correlation
1
0.8
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
30-Week Correlation 60-Week Correlation 90-Week Correlation
Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11
Sources: Bloomberg and Thom/Reuters Jeffries Commodities Index, which averages commodity futures prices with
monthly rebalancing. Last data point 9/28/2012.
Virtually all commodity-linked fund products and derivatives have launched in the last
five years, and their effect is palpable. Correlations with equity markets are now ~ 60%,
compared to ~0% prior to this era.
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BLUE PAPER | Living in a More Volatile Investment World November 2012
A Nasty Side Effect of Volatility –
Higher Correlation
The resulting feedback loop
is a key characteristic of the
current paradigm of “Riskon/Risk-off
” (“RORO”).
It is not just commodities that have been experiencing increased correlation with
equities. Almost all financial markets are now more highly correlated to each other.
HSBC has studied this phenomenon and has concluded that higher volatility and
higher correlations go hand in hand and are, in fact, self-reinforcing. The resulting
feedback loop is a key characteristic of the current paradigm of “Risk-on/Risk-off”
(“RORO”). To track the RORO phenomenon, HSBC created an index. Following is
a graphical depiction that highlights how, since Lehman, correlations and volatility
have been rising.
Higher Correlations and Higher Volatility Go Hand-in-Hand
0.50
0.45
HSBC RORO (“Risk On/Risk Off”) Index
ROROR
RORO Index
Index
Value
Value
0.40
0.35
0.30
0.25
0.20
0.15
0.10
RORO develops
Sep-90 Jan-95
Source: HSBC.Last data point 8/10/2012.
Jan-00
Jan-05
Jan-10
Aug-12
As we have discussed, there are a number of macro contributors to the volatility and
correlation phenomenon. However, reinforcing the macro backdrop is the continuing
evolution of the market structure – namely, the rise of the ETF phenomenon. As market
participants increasingly utilize ETFs and the number of ETFs proliferate, the pulses of
RORO are channeled through vehicles that are required to sell holdings indiscriminately,
likely reinforcing positive and negative feedback loops.
Continued “Fertilizer” for Higher Volatility
The landscape remains rife with potential volatility. Below, we enumerate several of the
more obvious factors. One could argue that a lot of these are embedded in the markets.
However, it is clear that the fragility of the economic backdrops and the distortions
created by central banks at the extremes of their monetary toolbox magnifies the effects
of exogenous shocks.
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BLUE PAPER | Living in a More Volatile Investment World November 2012
• Fiscal cliff – Political infighting in the U.S. Congress raises the risk of fiscal policy
paralysis and the so-called fiscal cliff where tax hikes, debt limits and spending cuts
will presumably converge. The IMF estimates the expiration of U.S. tax provisions and
automatic spending cuts mandated by sequestration could result in a 4% hit to GDP.
• Europe – ECB President Mario Draghi has verbally promised to “save the Euro” and
has hinted that he will keep funding European sovereigns via the short end of the
curve but investors have yet to see a clear indication of how he will accomplish this.
And in the meantime, the European economic environment continues to deteriorate.
• Mideast Tensions – The “Arab Spring” continues to roil the Mideast political
landscape. And in the background, growing concerns about Iran’s nuclear capability
and the possibility of an armed response by Israel will keep tensions high and will
affect the price of oil – which has the potential for significant negative consequences to
global GDP.
• Uncertain Chinese Growth – The rebound from China after the GFC was stunning,
but was predicated on an unsustainable level of stimulus. The Chinese then suffered
the aftereffects, including a higher-than-comfortable level of inflation and burgeoning
bad debts from mal-investment. Today, their economy is suffering a lack of demand
from Europe, pressuring their export engine. But a response like 2008-2009 is not
likely. So China, rather than a source of economic growth may, on the margin, be a
source of economic drag.
To Those Whose Investment Time Horizons are
Shrinking Quickly, Volatility is Dangerous
Why should we worry about volatility – why not just ride it out? Or wait it out?
The “wait it out” option is straightforward and it is one many people have chosen to
adopt out of fear. But it means that investors need to resign themselves to hiding out in
cash and other low-return investment options. On top of mediocre returns, investors
might be setting themselves up for a truly awful experience if the seemingly low-risk
investment turns out to be anything but.
The “ride it out” option is the “buy it and put it away in the drawer” approach. At
Pioneer, we continue to advocate that a long-term approach is the best way to invest
because among other things it tends to diminish “entry point risk” (basically buying
before a correction, then selling before it has had time to recover). With a long time
horizon, the risk that a volatile market hurts you either on the entry point or the exit
point diminishes.
Unfortunately, volatility is pernicious for those whose time horizons are shrinking.
And this is the central issue for a growing segment of the population currently in or
approaching retirement. This “baby-boom bulge” is forcing a shrinking of time
horizons. Ironically, as we have discussed, this is occurring at the same time that the
markets are becoming more antithetical to investors with shorter time horizons. And
these investors are demanding that income become a much larger, more central part of
their total return.
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BLUE PAPER | Living in a More Volatile Investment World November 2012
Pioneer’s Approach to Managing Volatility:
The Middle Way – Income-oriented, Multi-Asset/
Multi-Sector, Managed Volatility Strategies
Against today’s highly volatile investment backdrop, lower volatility strategies that still
offer reasonable returns are difficult to engineer. Many investment organizations have
tried to develop absolute return strategies that work in all market environments. Often,
they approach this challenge by attempting to either hedge away all beta and/or
focusing on the highest quality sections of the market. Inevitably, many of these
strategies produce meager returns as investment outcomes barely fluctuate around
returns on cash. Others have attempted to create lower volatility strategies that overly
rely upon correlations between asset classes as the key determinant of the strategy’s
construction. But as pointed out above, these correlations can break down at the most
inopportune time (usually when you need them to hold steady…) As a result, their
underlying results demonstrate anything but low volatility.
Our focus at Pioneer has been on creating income-oriented, multi-asset/sector
strategies that don’t overly rely upon hedges or correlations, but take a balanced
approach between the two.
• Income helps dampen the effects of volatility - the more consistent the better. We
think there is a secular demand component that will sustain demand for incomeproducing
investment for some time to come as investors seek out yield in this low
growth, low yield environment. Within a strategy, income also tends to ameliorate
investment mistakes (such as getting duration wrong in fixed income, or growth wrong
in equity). Over time, income has historically been one of the better dampeners of
volatility. The graph below compares the return and volatility characteristics of the
S&P 500 Index and the S&P Aristocrats (a subset of the stocks in S&P that exhibit
consistent dividend growth*).
* Dividends are not guaranteed.
One of the Better Dampeners of Volatility – Consistent Income
Percent Return
1,400
1,200
1,000
800
600
400
S&P 500
S&P 500 S&P 500 Aristocrats
Annualized Return 4.18% 8.00%
Volatility 15.67% 13.84%
Sharp Ratio 0.23 0.50
S&P 500 Dividend Aristocrats
200
0
Sep-90 Sep-93 Sep-96 Sep-99 Sep-02 Sep-05 Sep-08 Sep-11
Source: Pioneer, Bloomberg. Last data point 9/28/2012.
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BLUE PAPER | Living in a More Volatile Investment World November 2012
• As you can see, the volatility of those companies producing consistent and growing
dividends is lower than the average volatility of the S&P.
• Multi-asset/multi-sector approach broadens diversification. Diversification † is more
difficult to achieve in an investment environment plagued by high correlation. This
suggests that investors need to go farther afield. A multi-asset approach also holds the
potential for dramatically broadening the opportunity set.
• Hedges: While we like diversification within sectors and between asset classes, given
the correlation issues, we believe the approach of hedging through structurally
negatively correlated instruments (such as shorting the S&P as a way to reduce the
beta of an underlying portfolio) adds a dimension of volatility and risk control not
often found in traditional mutual funds.
Pioneer’s Heritage Shows Us The Way
At Pioneer, we have been building multi-asset/multi-sector approaches to investing in
fixed income since the late ‘90s. Our multi-sector bond fund was launched at a time that
its competitors generally did not stray too far from their Lehman U.S. Aggregate Bond
benchmark (now Barclays). Our approach was to build a strategy that had wide latitude
to allocate to a number of fixed income sectors vs. being restricted to small exposures
(or no exposure at all) in sectors such as high yield, foreign bonds and currency,
converts, emerging market debt, etc. We took this successful concept in the mid 2000s
and launched an institutional credit opportunity strategy (multi-sector high yield).
Shortly thereafter we launched our Pioneer Multi-Asset Real Return Fund and most
recently Pioneer Absolute Return Credit Fund, Pioneer Multi-Asset Income Fund and
Pioneer Multi-Asset Ultrashort Income Fund. All of these funds are built around the
concept of broad diversification, and a wide opportunity set.
Pioneer’s Strategies for Tackling Volatility (without
sacrificing the potential for strong returns)
Focus on Hedging: The role of hedging, the instruments used and the framework are
guided by the focus and purpose of the strategy.
• Pioneer Absolute Return Credit Fund (ARC): Hedging plays a prominent role in
managing NAV volatility, with the critical focus of seeking high stable income. Because
we seek higher income, we focus on hedges that either have very low carrying costs or
that have a positive carry.* The hedging strategy we employ is designed to encapsulate
a high yield-centric strategy with “guardrails.” We can mitigate volatility by shorting
S&P futures, buying volatility protection via the “VIX” curve (which has been called
the “fear index” and tends to be negatively correlated with equity markets) and by
buying long-dated Treasury futures. This helps to improve the stability of the NAV
without detracting from the income-producing potential of the portfolio. 1
* Positive carry is using one instrument to hedge against another and getting paid interest on that instrument.
† Diversification does not ensure a profit or protect against loss in a declining market.
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BLUE PAPER | Living in a More Volatile Investment World November 2012
• Pioneer Multi-Asset Income Fund (MAIF): Income is generated through a different
take on a traditional balanced approach – targeting potentially higher incomegenerating
fixed income securities combined with high dividend*-paying stocks. The
Fund uses multiple hedging strategies and instruments including currency, equity,
duration and credit. Hedging is driven by a combination of fundamental analysis and
market signals. The strategy based on market signals is similar to ARC’s methodology.
However, unlike ARC, whose hedging strategy is always “on” – a structural component
– hedging in MAIF is tactical and shorter-term in nature. 2
• Pioneer Multi-Asset Real Return (MARR): The Fund’s objective is to outperform
Consumer Price Index over a full market cycle (generally lasting 6-8 years) with lower
volatility than the average of the Morningstar World Allocation Funds’ peer group.
The strategy employs a top-down approach to identifying value globally across all
asset classes. Diversification is a key component, supported by tactical hedges. The
strategy employs a wide variety of hedging instruments — VIX futures (futures are
contracts bought or sold according to an expected price in the future. VIX futures
estimate the expected movement in the S&P 500 over the next 30 days.), ultra-short
ETFs (baskets of securities that trade on an exchange composed of securities that
mature in a year or less), options, etc. — that are selected based upon their cost
and effectiveness. 3
Broad diversification and low relative correlation:
• Pioneer Multi-Asset Ultrashort Income Fund (MAUI): Focuses on reducing – as
much as possible – credit, volatility, and duration risk. The Fund’s goal is to pursue
greater NAV stability over time than a typical short- or intermediate-term bond
fund** and seek higher income than a money market or a cash-equivalent instrument.
We seek to achieve this through broad diversification, a focus on floating rate
securities to reduce duration, low idiosyncratic credit risk through small (as
percentage) position sizes and a high proportion of very high quality, liquid securities
to cushion the fund when “risk” is being sold by market participants. 4
* Dividends are not guaranteed.
** Refers to Morningstar categories. The Morningstar Short-Term Bond funds average measures the performance of Short
Term Bond funds. The Morningstar Intermediate-Term Bond funds average measures the performance of intermediate- term
bond funds.
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BLUE PAPER | Living in a More Volatile Investment World November 2012
Having Your Cake and Eating It Too…
The Utopia of investment management is to produce high returns with no volatility
or downside risk. Unfortunately this Utopian ideal is just that – an ideal. But it does
inform our thinking – it is our “stretch goal.” We believe that we can continue to be
investors with long-term time horizons. Our average turnover for our funds attest to
this being part of our DNA. But we also recognize that investors are increasingly uneasy
with the volatility that sometimes comes with this approach. Thus, we have created
flexible, multi-asset strategies that can, at their core, be as long-term as possible while
managing the often treacherous volatility of the current and likely protracted
investment environment.
The views expressed in this memorandum regarding market and economic trends are those of Pioneer Investments,
and are subject to change at any time. These views should not be relied upon as investment advice, as securities
recommendations, or as an indication of trading intent on behalf of any Pioneer investment product. There is no
guarantee that market forecasts discussed will be realized. There is no guarantee that these trends will continue. No
forecast is a guarantee.
The performance data quoted represents past performance, which is no guarantee of future results.
Investors should consider risk tolerance and time horizons prior to making investment decisions. This material is not
intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent. Before
making any financial commitment regarding any issue discussed here, consult with the appropriate professional advisor.
To learn more about any Pioneer fund, visit our web site at us.pioneerinvestments.com
Before investing, consider the product’s investment objectives, risks, charges and expenses. Contact
your advisor or Pioneer Investments for a prospectus or a summary prospectus containing this information.
Read it carefully.
Neither Pioneer, nor its representatives are legal or tax advisors. In addition, Pioneer does not provide advice or recommendations.
The investments you choose should correspond to your financial needs, goals, and risk tolerance. For assistance in
determining your financial situation, please consult an investment professional.
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BLUE PAPER | Living in a More Volatile Investment World November 2012
A Word about Risk
1
Pioneer Absolute Return Credit Fund
All investments are subject to risk, including the possible loss of principal. Pioneer Absolute Return Credit (“ARC”) Fund has
the ability to invest in a wide variety of debt securities.
The Fund may invest in underlying funds (ETFs and unit investment trusts). In addition to the Fund’s operating expenses,
you will indirectly bear the operating expenses of investments in any underlying funds.
The Fund and some of the underlying funds employ leverage, which increases the volatility of investment returns and
subjects the Fund to magnified losses if an underlying fund’s investments decline in value.
The Fund and some of the underlying funds may use derivatives, such as options and futures, which can be illiquid, may
disproportionately increase losses, and have a potentially large impact on Fund performance.
The Fund may invest in inflation-linked securities. As inflationary expectations increase, inflation-linked securities
may become more attractive, because they protect future interest payments against inflation. Conversely, as inflationary
concerns decrease, inflation-linked securities will become less attractive and less valuable.
The Fund may invest in credit default swaps, which may in some cases be illiquid, and they increase credit risk since the
fund has exposure to both the issuer of the referenced obligation and the counterparty to the credit default swap.
The Fund may invest in floating rate loans. The value of collateral, if any, securing a floating rate loan can decline or may
be insufficient to meet the issuer’s obligations or may be difficult to liquidate.
The Fund may invest in event-linked bonds. The return of principal and the payment of interest on event-linked bonds are
contingent on the non-occurrence of a pre-defined “trigger” event, such as a hurricane or an earthquake of a specific
magnitude.
The Fund may invest in commodities. The value of commodity-linked derivatives may be affected by changes in
overall market movements, commodity index volatility, changes in interest rates, factors affecting a particular industry or
commodity, international economic, political and regulatory developments, supply and demand, and governmental
regulatory policies.
The Fund may invest in zero coupon bonds and payment in kind securities, which may be more speculative and fluctuate
more in value than other fixed income securities. The accrual of income from these securities are payable as taxable annual
dividends to shareholders.
Investments in equity securities are subject to price fluctuation.
Investments in fixed income securities involve interest rate, credit, inflation, and reinvestment risks. As interest rates
rise, the value of fixed income securities falls.
The Fund may invest in mortgage-backed securities, which during times of fluctuating interest rates may increase or
decrease more than other fixed-income securities. Mortgage-Backed securities are also subject to pre-payments.
Prepayment risk is the chance that mortgage-backed bonds will be paid off early if falling interest rates prompt homeowners
to refinance their mortgages.
High yield bonds possess greater price volatility, illiquidity, and possibility of default.
There is no assurance that these and other strategies used by the Fund or underlying funds will be successful.
Absolute return funds are not intended to outperform stocks and bonds during strong market rallies.
These risks may increase share price volatility.
Please see the prospectus for a more complete discussion of the Fund’s risks.
2
Pioneer Multi-Asset Income Fund
All investments are subject to risk, including the possible loss of principal. Pioneer Multi-Asset Income (“MAI”) Fund has the
ability to invest in a wide variety of securities and asset classes.
High yield bonds possess greater price volatility, illiquidity, and possibility of default.
Investments in fixed income securities involve interest rate, credit, inflation, and reinvestment risks. As interest rates
rise, the value of fixed income securities falls.
Prepayment risk is the chance that mortgage-backed bonds will be paid off early if falling interest rates prompt homeowners
to refinance their mortgages.
The Fund may invest in mortgage-backed securities, which during times of fluctuating interest rates may increase or
decrease more than other fixed-income securities. Mortgage-Backed securities are also subject to pre-payments.
The Fund may invest in subordinated securities which may be disproportionately adversely affected by a default or even a
perceived decline in creditworthiness of the issuer.
International investments are subject to special risks including currency fluctuations, social, economic and political
uncertainties, which could increase volatility. These risks are magnified in emerging markets.
The Fund may invest in inflation-linked securities. As inflationary expectations increase, inflation-linked securities may
become more attractive, because they protect future interest payments against inflation. Conversely, as inflationary
concerns decrease, inflation-linked securities will become less attractive and less valuable.
The Fund may invest in event-linked bonds. The return of principal and the payment of interest on event-linked bonds are
contingent on the non-occurrence of a pre-defined “trigger” event, such as a hurricane or an earthquake of a specific
magnitude.
The Fund may invest in floating rate loans. The value of collateral, if any, securing a floating rate loan can decline or may
be insufficient to meet the issuer’s obligations or may be difficult to liquidate.
14

BLUE PAPER | Living in a More Volatile Investment World November 2012
The Fund may invest in underlying funds (ETFs and unit investment trusts). In addition to the Fund’s operating expenses,
you will indirectly bear the operating expenses of investments in any underlying funds.
Investments in equity securities are subject to price fluctuation.
Small-and mid-cap stocks involve greater risks and volatility than large-cap stocks.
The Fund may invest in Master Limited Partnerships, which are subject to increased risks of liquidity, price valuation,
control, voting rights and taxation. In addition, the structure affords fewer protections to investors in the Partnership than
direct investors in a corporation.
The Fund may invest in zero coupon bonds and payment in kind securities, which may be more speculative and fluctuate
more in value than other fixed income securities. The accrual of income from these securities are payable as taxable annual
dividends to shareholders.
The Fund and some of the underlying funds may use derivatives, such as options and futures, which can be illiquid,
may disproportionately increase losses, and have a potentially large impact on Fund performance.
The Fund may invest in credit default swaps, which may in some cases be illiquid, and they increase credit risk since the
fund has exposure to both the issuer of the referenced obligation and the counterparty to the credit default swap.
The Fund and some of the underlying funds employ leverage, which increases the volatility of investment returns and
subjects the Fund to magnified losses if an underlying fund’s investments decline in value.
These risks may increase share price volatility.
There is no assurance that these and other strategies used by the Fund or underlying funds will be successful.
Please see the prospectus for a more complete discussion of the Fund’s risks.
3
Pioneer Multi-Asset Real Return Fund
All investments are subject to risk, including the possible loss of principal. Pioneer Multi-Asset Real Return (“MARR”) Fund
has the ability to invest in a wide variety of securities and asset classes.
In addition, the Fund is non-diversified which means it can invest a higher percentage of its assets in the securities of any
one or more issuers. This will increase the Fund’s potential risk exposure.
The Fund may invest in underlying funds (ETFs and unit investment trusts). In addition to the Fund’s operating expenses,
you will indirectly bear the operating expenses of investments in any underlying funds.
The Fund and some of the underlying funds employ leverage, which increases the volatility of investment returns and
subjects the Fund to magnified losses if an underlying fund’s investments decline in value.
The Fund and some of the underlying funds may use derivatives, such as options and futures, which can be illiquid,
may disproportionately increase losses, and have a potentially large impact on Fund performance.
The Fund and some of the underlying funds may employ short selling, a speculative strategy. Unlike the possible loss on
a security that is purchased, there is no limit on the amount of loss on an appreciating security that is sold short.
The Fund may invest in inflation-linked securities. As inflationary expectations increase, inflation-linked securities may
become more attractive, because they protect future interest payments against inflation. Conversely, as inflationary
concerns decrease, inflation-linked securities will become less attractive and less valuable.
The Fund may invest in credit default swaps, which may in some cases be illiquid, and they increase credit risk since the
fund has exposure to both the issuer of the referenced obligation and the counterparty to the credit default swap.
The Fund may invest in subordinated securities which may be disproportionately adversely affected by a default or even a
perceived decline in creditworthiness of the issuer.
The Fund may invest in floating rate loans. The value of collateral, if any, securing a floating rate loan can decline or may
be insufficient to meet the issuer’s obligations or may be difficult to liquidate.
The Fund may invest in event-linked bonds. The return of principal and the payment of interest on event-linked bonds are
contingent on the non-occurrence of a pre-defined “trigger” event, such as a hurricane or an earthquake of a specific
magnitude.
The Fund may invest in commodities. The value of commodity-linked derivatives may be affected by changes in overall market
movements, commodity index volatility, changes in interest rates, factors affecting a particular industry or commodity, international
economic, political and regulatory developments, supply and demand, and governmental regulatory policies.
Investments in equity securities are subject to price fluctuation.
Small-and mid-cap stocks involve greater risks and volatility than large-cap stocks. International investments are
subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase
volatility. These risks are magnified in emerging markets.
Investments in fixed income securities involve interest rate, credit, inflation, and reinvestment risks. As interest rates
rise, the value of fixed income securities falls.
The Fund may invest in mortgage-backed securities, which during times of fluctuating interest rates may increase or
decrease more than other fixed-income securities. Mortgage-Backed securities are also subject to pre-payments.
Prepayment risk is the chance that mortgage-backed bonds will be paid off early if falling interest rates prompt homeowners
to refinance their mortgages.
High yield bonds possess greater price volatility, illiquidity, and possibility of default.
These risks may increase share price volatility.
There is no assurance that these and other strategies used by the Fund or underlying funds will be successful.
Please see the prospectus for a more complete discussion of the Fund’s risks.
15

BLUE PAPER | Living in a More Volatile Investment World November 2012
4
Pioneer Multi-Asset Ultra Short Income Fund
All investments are subject to risk, including the possible loss of principal. Pioneer Multi-Asset Ultrashort Income (“MAUI”)
Fund has the ability to invest in a wide variety of debt securities.
The Fund may invest in underlying funds (ETFs and unit investment trusts). In addition to the Fund’s operating expenses,
you will indirectly bear the operating expenses of investments in any underlying funds.
The Fund and some of the underlying funds employ leverage, which increases the volatility of investment returns and
subjects the Fund to magnified losses if an underlying fund’s investments decline in value.
The Fund and some of the underlying funds may use derivatives, such as options and futures, which can be illiquid,
may disproportionately increase losses, and have a potentially large impact on Fund performance.
The Fund may invest in inflation-linked securities. As inflationary expectations increase, inflation-linked securities
may become more attractive, because they protect future interest payments against inflation. Conversely, as inflationary
concerns decrease, inflation-linked securities will become less attractive and less valuable.
The Fund may invest in credit default swaps, which may in some cases be illiquid, and they increase credit risk since the
fund has exposure to both the issuer of the referenced obligation and the counterparty to the credit default swap.
The Fund may invest in subordinated securities which may be disproportionately adversely affected by a default or even a
perceived decline in creditworthiness of the issuer.
The Fund may invest in floating rate loans. The value of collateral, if any, securing a floating rate loan can decline or may
be insufficient to meet the issuer’s obligations or may be difficult to liquidate.
The Fund may invest in event-linked bonds. The return of principal and the payment of interest on event-linked bonds are
contingent on the non-occurrence of a pre-defined “trigger” event, such as a hurricane or an earthquake of a specific
magnitude.
The Fund may invest in commodities. The value of commodity-linked derivatives may be affected by changes in overall market
movements, commodity index volatility, changes in interest rates, factors affecting a particular industry or commodity, international
economic, political and regulatory developments, supply and demand, and governmental regulatory policies.
The Fund may invest in zero coupon bonds and payment in kind securities, which may be more speculative and fluctuate
more in value than other fixed income securities. The accrual of income from these securities are payable as taxable annual
dividends to shareholders.
Investments in equity securities are subject to price fluctuation.
International investments are subject to special risks including currency fluctuations, social, economic and political
uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Investments in fixed income securities involve interest rate, credit, inflation, and reinvestment risks. As interest rates
rise, the value of fixed income securities falls.
The Fund may invest in mortgage-backed securities, which during times of fluctuating interest rates may increase or
decrease more than other fixed-income securities. Mortgage-Backed securities are also subject to pre-payments.
Prepayment risk is the chance that mortgage-backed bonds will be paid off early if falling interest rates prompt
homeowners to refinance their mortgages.
High yield bonds possess greater price volatility, illiquidity, and possibility of default.
There may be insufficient or illiquid collateral securing the floating rate loans held within the Fund. This may reduce the
future redemption or recovery value of such loans.
The Fund may have disadvantaged access to confidential information that could be used to assess a loan issuer, as
Pioneer normally seeks to avoid receiving material, non-public information.
These risks may increase share price volatility.
There is no assurance that these and other strategies used by the Fund or underlying funds will be successful.
Please see the prospectus for a more complete discussion of the Fund’s risks.
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Securities offered through Pioneer Funds Distributor, Inc.
Underwriter of Pioneer mutual funds, Member SIPC
60 State Street, Boston, Massachusetts
©2012 Pioneer Investments • us.pioneerinvestments.com 26009-00-0912