FIXED INCOME

I can find the courage to be cautious.

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CURRENT LANDSCAPE

Bond funds aren’t always what they seem.

Don’t just rely on a fund’s name or category. Some popular “core” bond strategies have strayed — prioritizing income over equity diversification. These funds may not provide the diversification that your client is counting on. Amid choppy markets, that's a big problem.

 

Three reasons why market volatility will likely continue

We’re late in the economic cycle.

The tailwind to asset prices from central bank policies is fading.

Trade tensions have increased.

UNINTENDED RISK

Know what your client owns.

Many popular bond strategies used for core fixed income have actually behaved more like credit, which may not provide strong diversification for equities.

88% of funds in the Intermediate-Term Bond category that did not behave like True Core, and what they actually behaved like:

Core Fixed Income Funds

Source: Morningstar. As of 12/31/18. According to Morningstar's Best Fit Index, applied to Morningstar Intermediate-Term Bond category. Funds examined are the top-quartile for trailing three-year average annual returns. Morningstar's Best Fit Index definition: The market index that shows the highest correlation with a fund's returns over the most recent 36-month period. This analysis, therefore, indicates that only 12% of top-quartile of funds in this Morningstar category were actually most highly correlated to core bonds. Totals may not reconcile due to rounding.

THE SOLUTION

Diversification for volatile times

With their modest historical correlation to equities, these bond funds could serve as a good complement to equity investments in balanced portfolios.

CORRELATION TO S&P 500 INDEX

The Bond Fund of America® -0.13
American Funds Strategic Bond Fund SM -0.15
The Tax-Exempt Bond Fund of America® -0.11
Limited Term Tax-Exempt Bond Fund of America® -0.17

Source: Morningstar. Data as of 12/31/18. Correlation between returns for Standard & Poor’s 500 Composite Index and respective fund results (F-2 share class). Three-year correlation for all funds, except American Funds Strategic Bond Fund, where correlation shown is for the period 4/1/16 (beginning of first full month after fund inception on 3/18/16) through 12/31/18.

CORRELATION: A statistical measure of how two securities move in relation to each other. A correlation ranges from -1 to 1. A positive correlation close to 1 implies that as one security moves, either up or down, the other security will move in “lockstep,” in the same direction. A negative correlation close to -1 indicates that the securities have moved in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random.

OUR PHILOSOPHY

Diversification is one of four key roles.

Our extensive experience in multi-asset portfolio investing has taught us that investors can build robust, well-diversified portfolios by including fixed income funds to serve one or more of four key roles.

Learn more about the four key roles of fixed income in our Implementation Guide.

The Bond Fund of America

Our flagship core bond fund can bring balance to portfolios.

2019
Outlook

Invaluable long-term perspective on markets and economies.

Fixed Income at Capital Group

Learn what makes us distinctive in fixed income.

Investments are not FDIC-insured, nor are they deposits of nor guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.

Content contained herein is not intended to serve as impartial investment or fiduciary advice. The content has been developed by Capital Group, which receives fees for managing, distributing and/or servicing its investments.

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries.

Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds.

The use of derivatives involves a variety of risks, which may be different from, or greater than, the risks associated with investing in traditional cash securities, such as stocks and bonds.

Income from municipal bonds may be subject to state or local income taxes and/or the federal alternative minimum tax. Certain other income, as well as capital gain distributions, may be taxable.

S&P 500 Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks. Standard & Poor's 500 Composite Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2019 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC.

© 2019 Morningstar, Inc. All Rights Reserved. Some of the information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar, its content providers nor the American Funds are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Information is calculated by Morningstar. Due to differing calculation methods, the figures shown here may differ from those calculated by American Funds.