Investment Perspectives

Recession: Do your bonds really have you covered?

Fixed income allocations play an important role in portfolios, especially during economic slowdowns. Portfolios often rely on the relatively low volatility bonds can provide during periods of equity swings. Common strategies many advisors use with this asset class, though, may not deliver the results they expect. 

Is there a better equity approach?

Many investors seek to upgrade the fixed income portion of their core portfolio in two ways:

Fixed income instinct 1: Shorten duration.

Shortening duration won’t help:

The Fed is already done hiking rates for now. 

Fixed income instinct 2: Overweight credit.

Rate hikes are behind us, but credit is priced dearly.

Sources: Bloomberg, Bloomberg Index Services Ltd. Midpoint of target range shown for fed funds target rate. Rise in yields shown is from the date of the first Fed rate hike in 12/2015 to 12/31/18. The red zone of credit spreads indicates that they are in the tightest quartile over the 20-year period ending 12/31/18, below 381 basis points.

 

It doesn’t pay to be overweight high-yield credit when spreads are tight or we’re late cycle.

Know what you own with bond funds.

  • Think your core bond fund has you covered? You may be exposed to unintended risks.
  • You’re not getting paid for taking more risk, so make sure your core bond fund is truly a core bond fund. Data suggest many are not.

Other approaches to consider

Downside resistance and discipline

The Bond Fund of America® (Class F-3, net of fees) (BFFAX)

Figures shown are past results for Class F-3 shares and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. For current information and month-end results, visit americanfunds.com.

Fixed income summary

Strategies

 

Multi-asset solutions

 

Portfolio consultation

Our experienced portfolio specialists can uncover opportunities and identify potential risks to enhance your portfolios and help you improve your clients’ outcomes. Their comprehensive process employs rigorous objective-based analysis, strategic evaluation and risk allocation.

To schedule a portfolio consultation, call 1-800-421-9889.

 

More in this series: Upgrade your core portfolio

When is the next recession?

Is there a better equity approach?

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.

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

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.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

American Funds Distributors, Inc., member FINRA.

The Standard & Poor’s 500 Composite Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks. The S&P 500 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.

The Bloomberg Barclays U.S. Aggregate Index represents the U.S. investment-grade fixed-rate bond market. Bloomberg® is a trademark of Bloomberg Finance L.P. (collectively with its affiliates, “Bloomberg”). Barclays® is a trademark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Neither Bloomberg nor Barclays approves or endorses this material, guarantees the accuracy or completeness of any information herein and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

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.

Higher yielding, higher risk bonds can fluctuate in price more than investment-grade bonds, so investors should maintain a long-term perspective.

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.

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. The 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.

All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.

AddThis Sharing Sidebar
Hide
Show