For many defined contribution (DC) plans looking to diversify their equity risk, the search for a fixed-income allocation that meets their risk-and-return needs has proved a difficult one. While US Treasuries, investment-grade credit, and agency mortgage-backed securities (MBS) can offer liquidity and diversification benefits, their returns are generally too low and too sensitive to rising interest rates for many investors. In this paper, we’ll discuss why we believe multisector credit may be a solution.
Important Risks: Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. • Loans can be difficult to value and less liquid than other types of debt instrument; they are also subject to nonpayment, collateral, bankruptcy, default, extension, prepayment and insolvency risks. • Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. • Mortgage related- and asset-backed securities’ risks include credit, interest-rate, prepayment, and extension risk. • Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fluctuations and adverse political and economic developments. These risks may be greater for investments in emerging markets. Diversification does not ensure a profit or protect against a loss in a declining market.