Fixed Income Implementation Guide | American Funds

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Fixed Income Implementation Guide

The Four Roles of Fixed Income in a Balanced Portfolio

Through Capital Group’s extensive experience in multi-asset portfolio investing, we use fixed income funds to serve four main roles. These similarly align with key client goals in asset allocation programs. These roles include: diversification from equities, income, capital preservation and inflation protection. By including a line-up of strategies that meet these goals, investors can build robust, well-diversified portfolios.

Diversification From Equities

Correlation to the S&P 500 Composite (%) — 3-Year Period (Class F-2)


Source: Morningstar. As of September 30th, 2017.
Three-year correlation measured against peer median using monthly return data and standard compounding method.

Cumulative Returns During Recent Market Corrections (%) — Class F-2

The ability to provide positive returns in periods of equity market corrections should be one of the goals of short-, intermediate- and core-bond strategies. Funds that provide diversification from equities can be good building blocks to create durable portfolios. They also allow investors to rebalance their asset allocation at an appropriate time in market cycles. This approach can help investors achieve long-term investment and savings goals.

Source: Morningstar.
Data as of September 30, 2017. Based on results of Class F-2 shares.
Dates shown for market corrections are based on price declines of 10% or more (without dividends reinvested) in the unmanaged S&P 500 with 50% recovery between declines. The returns of the fund and index are based on total returns. There have been periods when the funds have lagged the index, such as in rising equity markets.

Capital Preservation

Positive Three-Year Rolling Return, Since Fund Inception — Class F-2

A bond allocation should serve as a portfolio’s foundation, providing significant capital preservation even when the broader market is in turmoil. This can be achieved through hands-on management of duration and credit exposure. Our bond funds that have capital preservation as one of their goals have a strong track record of positive returns through a variety of markets.


Source: Morningstar.
Data as of September 30, 2017. Based on results of Class F-2 shares.


Average Yield-to-Maturity (%)


Source: Thomson Reuters, as of September 30, 2017.

One of a bond strategy’s central goals is to provide income. While most bond funds will provide some yield, higher income is generally associated with additional credit risk. A strategy’s objectives should help to determine what levels of income targets and risks are appropriate and how that fits in a broader asset allocation program.

Inflation Protection

Treasury Inflation-Protected Securities (TIPS) vs. Consumer Price Index (CPI)


Source: Thomson Reuters, as of September 30, 2017.

Many investment vehicles provide indirect protection against inflation. Nevertheless, we think it is important to have some explicit protection against rising prices, which can be achieved by investing in vehicles that invest in securities whose valuations have an explicit target linked to the Consumer Price Index. These funds can provide a more precise hedge against inflation, especially when inflation surprises to the upside.

Funds by Role

Our bond funds aim to serve the four roles of fixed income in different combinations and to varying degrees. 


Major role:     Minor role: 


Fund Details

How a fund fits into a portfolio can be better understood by a deeper look at its characteristics.

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1Earliest share class.
2This does not include unrated securities.
3Three-year correlation to the S&P 500 Index, Class F-2.
4These funds do not yet have 3 years of return history: American Funds Strategic Bond Fund inception date was March 18, 2016; American Funds Emerging Markets Bond Fund inception date was April 22, 2016.

The S&P 500 Composite Index (“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 © 2017 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.

Correlations calculated using returns as follows: for Inflation Linked Bond Fund and Corporate Bond Fund from the first full month after inception of their oldest share class; for Strategic Bond Fund’s composite from 7/31/2013 through 3/31/2016, F-2 share class thereafter. Emerging Markets Bond Fund’s correlation will be provided when more historical data becomes available.

Annualized 30-day yield is calculated in accordance with the SEC formula.

The S&P 500 is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks. The S&P 500 Composite Index (“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 © 2017 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.

Figures shown are past results and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and/or returns will vary, so investors may lose money. Investing for short periods makes losses more likely. View fund expense ratios and returns. 

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

This material is intended for use by financial professionals or in conjunction with the advice of a financial professional.

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. 

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. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds. Bond ratings, which typically range from AAA/Aaa (highest) to D (lowest), are assigned by credit rating agencies such as Standard & Poor's, Moody's and/or Fitch, as an indication of an issuer's creditworthiness. If agency ratings differ, the security will be considered to have received the highest of those ratings, consistent with the fund's investment policies. (For American High-Income Municipal Bond Fund and American High-Income Trust, such securities are placed in the lowest category.) Securities in the Unrated category have not been rated by a rating agency; however, the investment adviser performs its own credit analysis and assigns comparable ratings that are used for compliance with fund investment policies. Investments in mortgage-related securities involve additional risks, such as prepayment risk, as more fully described in the prospectus. While not directly correlated to changes in interest rates, the values of inflation-linked bonds generally fluctuate in response to changes in real interest rates and may experience greater losses than other debt securities with similar durations. 

State-specific tax-exempt funds are more susceptible to factors adversely affecting issuers of their states' tax-exempt securities than more widely diversified municipal bond funds. Income from municipal bonds may be subject to state or local income taxes and/or the federal alternative minimum tax (except for The Tax-Exempt Bond Fund of America). Certain other income, as well as capital gain distributions, may be taxable. 

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. American Funds Strategic Bond Fund may engage in frequent and active trading of its portfolio securities, which may involve correspondingly greater transaction costs, adversely affecting the fund's results.

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. 

There may have been periods when the fund(s) lagged the index(es). Certain market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index. 

Investment results assume all distributions are reinvested and reflect applicable fees and expenses. 

When applicable, investment results reflect fee waivers and/or expense reimbursements, without which results would have been lower. 

Fund results for periods before a share class was sold are hypothetical. These hypothetical returns were calculated by adjusting Class A share results without a sales charge for the difference between the Class A share expense ratio and the estimated expense ratio for the share class as of the date of first sale. View  dates of first sale and specific expense adjustment information

Expense ratios are as of the most recent prospectus. Expense ratios are estimated for American Funds College 2036 Fund. Expense ratios for funds of funds include the weighted average expenses of the underlying funds. 

The Capital Group companies manage equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.

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.

©2018 Morningstar, Inc. All Rights Reserved. Except for Lipper rating information, 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.

Past results are not predictive of results in future periods.