Bonds: Don’t put all your eggs in one manager or strategy basket

October 16, 2014 Categories: Portfolio Corner
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Eggs in basket
We’ve all heard the saying, “don’t put all your eggs in one basket.” When talking about investing, the phrase implies you shouldn’t put all of your dollars in a single investment. And as highlighted by recent headlines, that same saying can be applied to investing your entire bond portfolio in a single manager or strategy.

A single manager can be quite risky. Not only is there the risk of intellectual capital loss when key investors change firms or retire, but also no single manager can consistently outperform in all of the diverse sectors of the fixed income market and no one strategy can perform well in every market environment. What helps a manager or strategy outperform in one environment may lead to underperformance in another. This isn’t a negative reflection on most longer-term strategies, but rather recognition that all investment strategies have strengths and weaknesses that manifest themselves at different times.

That’s why I believe investors are better served by investing in bond portfolios that make use of multiple managers and strategies. Through these, investors can avoid single-manager risk by accessing the skills of best-in-class specialist managers across the various segments of the fixed income market. And it’s not just about selecting ”top” managers, but thoughtfully combining managers and strategies based on their own unique skill sets, how they might be expected to perform in various market environments and most importantly, their portfolio diversification benefits. While diversification and multi-manager investing do not assure a profit or protect against loss, they can have significant advantages over concentrating in a single manager or strategy.

The latest fixed income headlines have been preceded by the fear of rising interest rates and the impact on bond valuations, along with the broad U.S. bond market posting its worst total return in 2013 since 1994.1 All of this has led many investors to question the role—or even the very existence—of bonds in their portfolios. However, it’s important for investors to not get distracted from the primary reasons why bonds are included in a well-diversified portfolio in the first place—to help investors stay invested for the long-term by offering diversification and potential for lower volatility with a modest return.

The bottom line

Finding a fixed income product with multiple managers and strategies can take diversification a step further—and helps avoid putting all of those eggs in one basket.

1 Barclays U.S. Aggregate Bond Index (an index with income reinvested, generally representative of intermediate-term government bonds, investment-grade corporate debt securities and mortgage-backed securities) returned -2.0% for the year ending December 2013.

Diversification does not assure profit or protect against loss in declining markets.

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall. When interest rates are at low levels there is risk that a sustained rise in interest rates may cause losses to the price of bonds.

Bond investors should carefully consider risks such as interest rate, credit, default and duration risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield (“junk”) bonds or mortgage-backed securities, especially mortgage-backed securities with exposure to sub-prime mortgages. Generally, when interest rates rise, prices of fixed income securities fall. Interest rates in the United States are at, or near, historic lows, which may increase a Fund’s exposure to risks associated with rising rates.

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