Many investors use their fixed-income allocation to pursue a wide range of investment objectives simultaneously, including liquidity, diversification, capital preservation, income, and total return. However, in the interest of simpler portfolio construction, some investors may be relying upon a single, all-purpose fixed-income solution that is expected to play too many roles and may also carry hidden risks—for example, having a higher correlation to equities than intended from a fixed-income allocation.
Here we explore how investors can seek to make their fixed-income allocations more effective, while still keeping it simple. In our view, the key lies in: 1) clearly defining one’s fixed-income investment objectives; and 2) using a small number of building blocks to implement the allocation (rather than employing a traditional “all-in-one” product).
Important Risks: Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall.