To yield or not to yield

Core fixed income managers are struggling to provide a sufficient level of income for their clients. For example, as seen in the chart below, as of April 30, 2018, nearly 80% of the funds within the Morningstar Intermediate-Term Bond Category had a lower yield than that of the Bloomberg Barclays US Aggregate Index.

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* Yield to worst. The index has no SEC yield.

Source: Morningstar Direct, as of April 30, 2018

What this means for investors

Investors should check on whether their core bond manager is delivering the income that clients expect. A flexible core fixed income manager can help provide higher income by investing in sectors not represented in the benchmark Bloomberg Barclays US Aggregate Index.


The Bloomberg Barclays US Aggregate Index is a broad composite that tracks the investment grade domestic bond market.

The Morningstar Intermediate-Term Bond Category compares funds that invest primarily in corporate and other investment grade US fixed income issues and typically have durations of 3.5 to 6.0 years. These funds are less sensitive to interest rates, and therefore less volatile, than funds that have longer durations.

IMPORTANT RISK CONSIDERATIONS

Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt.

Bond funds may also be subject to prepayment risk, the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity, at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.

High yielding, non-investment-grade bonds (junk bonds) involve higher risk than investment grade bonds. The high yield secondary market is particularly susceptible to liquidity problems when institutional investors, such as mutual funds and certain other financial institutions, temporarily stop buying bonds for regulatory, financial, or other reasons. In addition, a less liquid secondary market makes it more difficult for a fund to obtain precise valuations of the high yield securities in its portfolio.

Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.

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