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
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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
SEC TION 1 The Core Conundrum
INVES TMENT PROFESSIONAL S
3
SEC TION 2 7 Coping with New Market Realities SEC TION 3 Future Investment Blueprint
10
2 | PORTFOLIO STRATEGY RESEARCH
B. SCOT T MINERD Chief Investment Officer ERIC S. SILVERGOLD Senior Managing Director, Portfolio Manager
ANNE B. WALSH, CFA Assistant Chief Investment Officer, Fixed Income JAMES W. MICHAL Director, Portfolio Manager
KELECHI C. OGBUNAMIRI Associate, Investment Research
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SEC TION 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
Artificially low yields have long been the case with
Government and Agency Markets
Treasuries, and this distortion is increasingly true
Having reached the limits of conventional monetary
for agency mortgage-backed securities (MBS),
policy, quantitative easing (QE) has become the
which have been purchased at the rate of $40 billion
preferred tool for U.S. central bankers to keep interest
per month since the start of QE3 in September
rates artificially low in hopes of stimulating the
2012. With the start of an additional $45 billion per
economy. Over the past five years, the total aggre-
month Treasury purchase program beginning in
gate assets on the Federal Reserve’s balance sheet
January 2013, and the Fed’s statement that highly
increased by a staggering 225 percent (compared
accommodative monetary policy will continue
to 22 percent over the previous five-year period).
at least until specific unemployment or inflation
Recognizing that the Fed’s asset purchases are
targets are reached, Treasury and agency MBS
entirely policy-driven and contrary to natural
markets are likely to remain distorted throughout
market dynamics, investors should pause to fully
the next several years. Today, these overbought
appreciate the attendant implications. Whenever
asset classes currently represent nearly 75 percent
there is an uneconomic buyer making large-scale
of the Barclays U.S. Aggregate Bond Index.
investment decisions irrespective of price, market distortions are inevitable.
3 | THE CORE CONUNDRUM
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The Impact of the Financial Crisis Rise in U.S. Treasury Debt Outstanding since the Financial Crisis $20Tn
2001 – 2006 46%
projected 68%
2007 – 2012 162%
$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%
2007
Treasuries Agency MBS Agency Bonds Investment-Grade Bonds Non-Agency MBS Taxable Municipals ABS
34.5%
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.
4 | THE CORE CONUNDRUM
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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
the universe of fixed-income assets. However,
Composition of Barclays Agg
the fixed-income universe has evolved over the
Since its creation in 1986, the Barclays U.S.
past twenty years with the growth of sectors
Aggregate Bond Index (the “Index” or the “Agg”)
such as asset-backed securities and municipals.
has become the most widely used proxy for the U.S.
Over the past five years, the composition of the
bond market with over $2 trillion in fixed-income
Barclays Agg has been altered by the massive
assets managed to it. Inclusion in the Agg requires
volume of Treasuries issued in response to the
that securities be U.S. dollar-denominated,
U.S. financial crisis.
investment-grade rated, fixed-rate, taxable, and meet minimum par amounts outstanding. In 1986,
The sheer glut of Treasuries and their increasingly
the fixed-income landscape primarily consisted of
dominant representation in the Index is a trend
U.S. Treasuries, agency bonds, agency MBS, and
unlikely to reverse anytime soon. The need
corporate bonds – all of which met these inclusion
to fund government shortfalls – present and
criteria. Therefore the Agg was a useful proxy for
future – is astonishing. The U.S. Treasury debt
5 | THE CORE CONUNDRUM
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balance totaled $4.5 trillion in 2007. By the end
Anchored to a benchmark heavily allocated to
of 2012, it had skyrocketed to $11.3 trillion. Yet,
sectors yielding negative real rates of return
it is projected to go even higher – hitting $18.9
has forced investors to reassess the traditional,
trillion by 2022, according to estimates from the
benchmark-driven approach to core fixed-income
Congressional Budget Office. As Treasuries climbed
management. While historically, core strategies
from 19 percent of the core fixed-income universe
have had negligible exposure to leveraged credit,
to 35 percent over the last five years, the market-
emerging-market debt, and non-agency structured
capitalization weighted Agg has followed suit.
credit – all of which are typically higher yielding
Treasuries currently comprise 37 percent of the
and commensurately, higher risk segments of the
Agg, and combined with agency debt, total U.S.
fixed-income universe – this aversion to riskier
government-related debt comprises nearly 75
assets appears to be waning given the need for
percent of the Index with a weighted-average yield
yield. In the next section, we will analyze the
of 1.6 percent, as of January 31, 2013.
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%
5.0%
5.5%
0% Sector Weight
1.9%
Barclays Agg 100.0%
4.5% 1.8%
1.0% ABS 0.4%
Historical High
6.6%
5.5%
3.3% 3%
7.9%
8.0%
7.3%
Municipals 1.4% Historical Low
CMBS 1.8% Current
2.8%
2.5% 1.1%
0.9% Corporates 21.6%
Treasuries 36.6%
Agency MBS 29.4%
Agency Bonds 8.9%
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.
6 | THE CORE CONUNDRUM
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SEC TION 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
low-rate environment. Despite historically low yields,
For investors who service their cash liabilities
materially lowering investment return targets is
through the income stream generated from their
simply not a viable option for particular investor
bond portfolios, relative performance to an Index,
classes. As portfolio return targets remain unhinged
that finished 2012 with a total return of 4.2 percent
from current market yields, many investors have
and a yield of 1.7 percent, is of secondary impor-
begun assuming increased investment risks.
tance, and in some cases, inconsequential. For
Demand for yield has precipitated a relaxation
institutional investors, such as insurance companies,
in underwriting standards and eased the avail-
pension funds, and endowments, absolute yields
ability of credit. For example, during 2012, the
and returns are preeminently important. While
investment-grade and high-yield bond markets
several prominent pension funds recently lowered
set records for issuance. Particularly in the high-
portfolio return estimates by 25 to 50 basis points,
yield market, there was a significant increase in
these diminutive cuts appear largely symbolic
deals lacking covenant protection; volume from
in nature as they fail to address the investment
lower-rated, first-time issuers; and aggressive deal
shortfall concerns emanating from this persistent,
structures. The negative, long-term impact of
7 | COPING WITH NEW MARKET REALITIES
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these worsening trends in new issuance is currently
Asymmetric Risk in Treasuries
being obscured by the benign credit environment,
During the 1940s, the Fed, acting in concert with
a by-product of the Fed’s unprecedented monetary
the Treasury Department, fixed interest rates on
accommodation. As the Fed begins the fifth year of
short-term Treasury bills while committing to buy
its zero-bound monetary policy, continued expec-
long-term Treasury bonds in order to ensure cheap,
tations for low rates would appear to mitigate the
adequate financing for World War II and the
risk of extending duration in pursuit of incremental
attendant recovery. The end of this practice, under
yield. However, using historical precedent as our
the Treasury Accord of 1951, led to a tumultuous
guide, the market sometimes fails to effectively
sell-off in longer-duration bonds as the market
discount the potential for sudden monetary
failed to anticipate the shift in monetary policy.
policy shifts.
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
10-Year Treasury Yield
11% 9% 7% 5% 3% 1% 1800
Treasury Accord 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.
8 | COPING WITH NEW MARKET REALITIES
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Era of “Return-Free Risk” U.S. 10-Year Treasury One-Year Holding Period Returns 15% A 20 basis point move in rates wipes away the total return in 10-year Treasuries
Nominal Total Return
10% 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
The dearth of yield within traditional core fixed-
of the 1950s occur? While we do not envision any
income sectors has resulted in an uptick in tracking
sudden monetary policy shifts or a meaningful
error as investors increase allocations to riskier
rise in rates in the near term, given where rates
investments, such as emerging-market bonds and
are today and how grossly overvalued Treasury
high-yield debt. According to eVestment Alliance,
securities have become, the risk to rates is clearly
the average tracking error for core fixed-income
to the upside. At current coupon rates, a 20 basis
strategies rose to 1.09 percent over the past three
point rise in rates would result in a negative total
years ending December 2012, compared to 0.66
return on 10-year Treasuries over a one-year holding
percent in the three-year period from 2005 to 2007.
period. Based on the asymmetrical risk-return
Given investors’ increased willingness to venture
profile, we believe Treasuries have gone from
outside the traditional confines of core fixed-income,
offering “risk-free returns” to now effectively
in the following section, we propose a more optimal
becoming “return-free risk.”
method to generate attractive yields without sacrificing credit quality or extending duration.
9 | COPING WITH NEW MARKET REALITIES
GUGGENHEIM PARTNERS
SEC TION 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
yields to longer-dated corporate bonds with signific-
Predicated on our view that the risk to interest rates
antly less interest rate risk. While traditional
is to the upside, we would advise investors to
securitizations of credit card receivables, student
shorten portfolio duration and look for innovative
loans, and auto loans represent the majority of the
ways to approach core fixed-income investing.
ABS market, the sector has diversified into more
Shortening duration offers a buffer against rising
specialized, niche segments of securities backed
rates, but this generally comes at the expense
by various types of collateral, such as aircraft
of yield, particularly in corporate credit securities.
and shipping container leases, timeshare vacation
The presumed positive correlation between yield
ownership interests, and franchise fees. Largely
and duration in the investment-grade universe has
owing to its association with the subprime crisis,
driven demand down the credit spectrum into
these types of lesser-known, “orphan” credits suffer
lower-rated, high-yield bonds. A broader investment
from a lingering negative connotation. The illiquidity
focus beyond the traditional core fixed-income
and complexity of these non-traditional, “off-the-
framework demonstrates that lowering duration
run” sectors provide opportunities to generate yield
and producing attractive portfolio yields do
in excess of comparably rated corporate credits.
not necessarily have to be mutually exclusive
While corporate bond investors are exposed to the
investment objectives.
credit risk of a specific issuer or entity, idiosyncratic risks are mitigated in CLOs and ABS through large,
Within the investment-grade universe, floating-rate
diversified collateral pools. Additionally, these
collateralized loan obligations (CLO) and short-
securities offer significant downside structural
duration asset-backed securities (ABS) offer similar
protection during stressed economic environments
10 | FUTURE INVESTMENT BLUEPRINT
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through overcollateralization, excess spread,
These traditional sectors, which represent the
reserve accounts, and triggers that cut off cash
lion’s share of the ABS exposure in the Barclays
flows to subordinated tranches. Lastly, the
Agg, have a weighted-average yield of 1.0 percent.
amortizing structures of many asset-backed
Yields on credit card ABS are currently below
securities reduce credit exposure over time,
1 percent, while yields on auto loans are between
while risks remain constant in corporate bonds
1 and 2 percent. Although student loans offer
due to their bullet maturities.
slightly higher yields of 2 to 4 percent, the regulatory risk coupled with our belief that loan
Monetizing Complexity
prepayments will be low, which would extend
Despite the generally positive credit fundamentals
the average life of the securities to 10 to 15 years,
in traditional ABS sectors, low nominal yields
significantly reduce their relative attractiveness.
decrease the attractiveness of these segments.
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 CLO 600bps ABS 300bps Corporate 0bps 2002
2004
2006
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.
11 | FUTURE INVESTMENT BLUEPRINT
2008
2010
2012
Spread
High:
Low:
Avg:
Last:
CLO
2,070
68
460
315
ABS
1,983
104
431
200
87
199
163
Corporate 710
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Discovering Yield in the Investment-Grade Universe New Issue, Esoteric ABS Provide Yield without Increased Credit and Rate Risk 8%
Barclays B Corporate Index
Yield to Worst
6%
(A S&P / A Fitch) Barclays BB Corporate Index (A S&P / A Fitch)
4%
Barclays BBB Corporate Index
BofA ML ABS Master BBB-AA Index
Barclays A Corporate Index
2% Barclays U.S. Aggregate Bond Index (AA)
Barclays AA Corporate Index
0% 2
3
4
5 Duration
6
7
8
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
have shorter durations, and offer yields in excess
are the two sectors currently offering the most
of 6 percent on senior BBB tranches – a premium
attractive relative value. CLOs are benefitting from
of almost 300 basis points over corporate bonds.
low bank loan default rates, healthier corporate
Due to the immense diversity and complexity
balance sheets, and robust new loan issuance
of CLOs and ABS, however, ascertaining relative
(nearly $300 billion in 2012). In the aircraft ABS
value requires in-depth analysis of both deal
space, the recent wave of restructurings and
structure and the underlying collateral.
recapitalizations of U.S. airlines have resulted in improved profitability and lower fixed costs.
Long-Duration Strategy
Leasing rates have been supported through the
For investors who need to maintain longer asset
increased demand from airlines that have chosen
duration in order to match their liabilities, floating-
to lease rather than buy aircraft. In addition to
rate CLOs or short-duration ABS can be combined
our favorable view on the underlying collateral,
with longer-duration, fixed-rate securities as part
aircraft ABS securities tend to be amortizing,
of a barbell strategy. (“Barbell” means to structure
12 | FUTURE INVESTMENT BLUEPRINT
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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
momentum of the housing sector. Home price
securities in order to achieve a desired duration
appreciation will eventually translate into higher
target.) Utilizing this approach provides investors
property tax assessments realized by local govern-
with yield advantages while still meeting portfolio
ments over the next several years.
duration objectives. With a barbell strategy, the negative impact of rising rates on the longer-
Aside from these improving fundamental factors,
duration, fixed-rate assets is partially offset by
the municipal sector may also benefit from technical
the positive benefit of higher interest coupons
catalysts. Building upon the record $50 billion in
on floating-rate CLOs. In the case of ABS, shorter
mutual fund inflows in 2012, continued demand
maturities and principal amortizations allow
for municipals will likely be aided by the expected
investors to reinvest proceeds at higher yields
growth of the U.S. economy throughout 2013.
if rates were to rise over an extended period.
Increased Federal revenues may lead to a decline in Treasury bond issuance, forcing investors into
To complement the short duration of ABS in the
other government-related alternatives such as
barbell strategy, we prefer select, longer-dated,
municipals and military housing. Our focus remains
taxable municipal bonds that offer yield premium
on A-rated revenue bonds maturing within 20 years
to Treasuries and agency debt. The political
that finance essential services, public universities
uncertainty over the past several years, namely
and transportation.
the debt ceiling debate and the Fiscal Cliff, has created attractive valuations in the municipal
Active Management in Practice
market. As investors begin focusing on the real
With nominal coupons across the fixed-income
economy and not the political economy, we believe
universe near historical lows, the opportunity cost
municipals are primed to benefit. According to
from employing a benchmark-driven, passively
the Rockefeller Institute, state tax revenues have
managed strategy has increased dramatically. An
grown for 10 consecutive quarters as employment
actively managed strategy provides the opportunity
at the state and local government level has stabilized.
to generate returns through targeted weightings
California, once the poster child for fiscal ineptitude,
to attractively valued sectors. The volatility of sector
is projecting an $850 million budget surplus for
performance over the past few years, quantified
full year 2014. A longer-term tailwind for municipal
in the following table, underscores the importance
credit fundamentals will be the continued
of active management.
13 | FUTURE INVESTMENT BLUEPRINT
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The Future of Core Fixed-Income
the demand for absolute yield, antiquating investors’
The traditional view of core fixed-income did not
historical focus on relative performance.
include active duration management, increased tolerance for tracking error, or significant allocations
In pursuing yield targets, investors must not allow
to non-indexed sectors such as floating-rate CLOs
short-term pursuits to derail long-term investment
and “off-the-run” ABS. As the chasm between
objectives. We believe the global easing cycle will
investors’ return targets and current market yields
continue to support a benign credit environment
deepens, it is apparent that the traditional view of
over the next two to three years; however, the current
core fixed-income management requires innovation.
accommodative conditions are likely masking a
The historically low-rate environment has intensified
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
High Yield
Treasuries
Treasuries
11.8
%
Leveraged Loans
7.3
%
9.0
%
Municipals
7.6
%
13.7
%
Municipals
7.0
%
2010
2011
2012
High Yield
High Yield
Municipals
High Yield
%
%
%
58.2
Leveraged Loans
44.9
%
ABS
IG Corporates
IG Corporates
-4.9%
24.7%
IG Corporates
ABS
ABS
IG Corporates
4.7% 4.3
%
Municipals
3.2
%
Treasuries
3.1%
4.6 % 2.2
%
Leveraged Loans
1.9
%
High Yield
1.9%
-12.7
%
High Yield
-26.2
%
Leveraged Loans
-28.8%
ABS
18.7
%
Municipals
0.7
%
Treasuries
-3.6 %
15.1
Leveraged Loans
10.0
%
18.1
15.8% IG Corporates
Treasuries
9.8
9.8%
%
IG Corporates
IG Corporates
Municipals
Municipals
ABS
Leveraged Loans
9.0 % 7.2
%
Treasuries
5.9
%
ABS
5.9%
8.1% 5.1
9.4%
%
High Yield
5.0
ABS
3.7%
%
Leveraged Loans
1.8%
9.6 %
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
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The Changing of the Guard The Future of Core Fixed-Income Management Traditional View: Barclays Agg YIELD
WEIGHT
U.S. Treasuries Agency MBS
Agency Bonds
1.3%
Corporates
Corporates
2.7%
RMBS n/a
RMBS
CMBS
74.7%
CMBS
1.7%
Taxable Municipals
gov.-related debt
Taxable Municipals
3.2%
ABS
ABS
0.9% 1.7%
Weighted-Average Yield 0%
1%
Weighted-Average Yield
2%
3%
4%
5%
0%
Future View: Guggenheim Core Fixed-Income U.S. Treasuries WEIGHT
U.S. YIELD Treasuries
0.9%
Agency MBS Agency Bonds U.S. Treasuries
0.9%1.3%
2.7% 2.2% gov.-related debt
RMBS n/a Agency Bonds
1.3%
CMBS Corporates
1.7%
RMBS Agency Bonds
2.3%
1.7% 2%
3.2% 3%
4%
5%
1.7%
Weighted-Average Yield 1%
0%
2%
4.2% 5.0%
CMBS Corporates 3.2%
1% 0.9%
2.3% 2.3%
4.2% 4.7%
Taxable Municipals RMBS
5.0% 4.8%
ABS CMBS
4.7%4.9%
0.9% 1.7%
Weighted-Average Yield Taxable Municipals ABS 0%
2.3% 1.0%
Corporates Agency MBS
2.7%
Taxable Municipals RMBS n/a ABS CMBS
Agency Bonds U.S. Treasuries
16.6%
Corporates Agency MBS
1.0%
Agency MBS
2.2%
Weighted-Average Yield Taxable Municipals ABS 0%
1%
2%
3%
4%
5%
4.2% 4.8% 5% 4.9%
4%
Weighted-Average Yield 3%
4.2%
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 Agency MBS 2.3% management. Source: Barclays, Guggenheim Investments. Data as of 12/31/2012. Sector allocations are based on the representative
2.2%
Agency Bonds
2.3%
account of the Guggenheim Core Fixed-Income Strategy and excludes cash.
Corporates
2.7%
4.2%
RMBS
5.0%
CMBS
4.7%
Taxable Municipals
3.2%
4.8%
ABS
Given the overwhelming emphasis on total return, Weighted-Average Yield
7% 3%
4%
5%investors
must be vigilant in identifying the 1% 2% 3% risks 4% 0%
4.9%
4.2%
involved in reaching for incremental yield, since “not all yield is created equal.” Employing investment
By remaining tightly aligned to the Barclays Agg, which 5%
is currently bloated with low-yielding
government-related debt, investors are giving up 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 underper-
targets without assuming undue risk has proven
formance is to remain anchored to outdated core
extremely difficult under the traditional framework.
fixed-income conventions of the past.
We believe it is achievable under a broadened investment framework. 15 | FUTURE INVESTMENT BLUEPRINT
1.0%
Agency MBS
2.2%
Agency Bonds
7%
%
U.S. Treasuries
0.9%
GUGGENHEIM PARTNERS
1%
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: INVES TMENTS
SECURITIES
INSUR ANCE
Fixed Income Equities Alternatives Managed Account Platform Asset Allocation
Advisory Financing Sales and Trading Research
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
CHIC AGO
SANTA MONIC A
LONDON
135 E 57th St | 10022 212 739 0700
227 W Monroe St | 60606 312 827 0100
100 Wilshire Blvd | 90401 310 576 1270
5 Wilton Road | SWIV 1AN +44 207 052-8272
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. 1
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.
16 | PORTFOLIO STRATEGY RESEARCH
GUGGENHEIM PARTNERS