In 2013 90% of traditional bond funds lost money.* These funds once considered “safe” were negatively impacted by rising interest rates. So what can investors do with the bond allocations in their portfolio? Think about non-traditional strategies that are not constrained by traditional bond benchmarks. These strategies often incorporate multiple sources of return outside of benchmarks. In addition, active duration management can be employed to reduce interest rate risk. In addition, think about bonds funds that invest in floating rate securities such as bank loans. The interest rates on these securities float above prevailing short term rates, thus offering the potential for income, particularly when interest rates are rising.
The bond universe is vast, and seeking strategies and sectors outside of traditional corporate bonds and U.S. treasuries can seek to enhance returns and reduce portfolio volatility.
Source: Morningstar. Traditional Bond Funds represented Morningstar Intermediate Bond category.
Author: Jason Napoli, ChFC®, AAMS®, MBA