The Core Conundrum: Dealing with Fixed-Income Market Realities
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Transcript of The Core Conundrum: Dealing with Fixed-Income Market Realities
1 | PORTFOLIO STRATEGY RESEARCH GUGGENHEIM PARTNERS
THE CORE CONUNDRUMPORTFOLIO STRATEGY RESEARCH | FEBRUARY 2013
As U.S. monetary policy continues to artificially depress yields on government-related securities, traditional core fixed-income strategies have proven less effective in achieving total return objectives. Compounding this issue is the flagship fixed-income benchmark, which has become heavily concentrated in government and agency debt. As benchmark yields languish around 1.9 percent, the chasm between investors’ return targets and current market realities deepens.
Bridging this gap, without assuming undue credit or duration risk, requires a shift away from the traditional view of core fixed-income management in favor of a more diversified, multi-sector approach. An increased tolerance for tracking error provides the flexibility to increase allocations to undervalued yet high-quality credits across sectors. We believe this approach offers a more sustainable way to improve total risk-adjusted returns in today’s low-rate environment.
2 | PORTFOLIO STRATEGY RESEARCH GUGGENHEIM PARTNERS
• The combined impact of U.S. monetary and fiscal policy has created the core conundrum: How can core fixed-income investors meet their yield objectives while maintaining low tracking error to the Index, which has become approxi-mately 75 percent concentrated in low-yielding government-related debt?
• The benign credit environment is encouraging investors to take investment shortcuts, such as increasing credit and duration risk, to generate yield. History has shown that the market has a tendency to underestimate these risks, particularly during periods of monetary policy accommodation.
• In the current environment, we believe the surest path to underperformance is to remain anchored to the past. Investors must develop a new, sustainable, long-term strategy to generate yield without assuming excessive credit or duration risk.
• Accessing short-duration, investment-grade quality securities with consider-able yield pickup relative to government and corporate bonds may be the investment blueprint needed to navigate the current low-rate environment and hedge against interest rate risk.
Report Highlights
INVESTMENT PROFESSIONALS
B. SCOTT MINERD Chief Investment Officer
ERIC S. SILVERGOLD Senior Managing Director, Portfolio Manager
KELECHI C. OGBUNAMIRI Associate, Investment Research
ANNE B. WALSH, CFA Assistant Chief Investment Officer, Fixed Income
JAMES W. MICHAL Director, Portfolio Manager
OVERVIEW
CONTENTS
SECTION 1 3 The Core Conundrum
SECTION 2 7 Coping with New Market Realities
SECTION 3 10 Future Investment Blueprint
3 | THE CORE CONUNDRUM GUGGENHEIM PARTNERS
Monetary Policy Distorting
Government and Agency Markets
Having reached the limits of conventional monetary
policy, quantitative easing (QE) has become the
preferred tool for U.S. central bankers to keep interest
rates artificially low in hopes of stimulating the
economy. Over the past five years, the total aggre-
gate assets on the Federal Reserve’s balance sheet
increased by a staggering 225 percent (compared
to 22 percent over the previous five-year period).
Recognizing that the Fed’s asset purchases are
entirely policy-driven and contrary to natural
market dynamics, investors should pause to fully
appreciate the attendant implications. Whenever
there is an uneconomic buyer making large-scale
investment decisions irrespective of price, market
distortions are inevitable.
Artificially low yields have long been the case with
Treasuries, and this distortion is increasingly true
for agency mortgage-backed securities (MBS),
which have been purchased at the rate of $40 billion
per month since the start of QE3 in September
2012. With the start of an additional $45 billion per
month Treasury purchase program beginning in
January 2013, and the Fed’s statement that highly
accommodative monetary policy will continue
at least until specific unemployment or inflation
targets are reached, Treasury and agency MBS
markets are likely to remain distorted throughout
the next several years. Today, these overbought
asset classes currently represent nearly 75 percent
of the Barclays U.S. Aggregate Bond Index.
In an environment where the benchmark index is heavily concentrated
in low-yielding government and agency securities, maintaining low
tracking error and pursuing total return targets have seemingly become
contradictory objectives. In the following section, we will discuss how
recent monetary and fiscal policy has created this conundrum for
core fixed-income investors.
The Core ConundrumSECTION 1
4 | THE CORE CONUNDRUM GUGGENHEIM PARTNERS
As the U.S. government’s fiscal deficit soared from 1.3 percent of GDP in 2007 to 10.4 percent of GDP by 2009, the resulting impact was a significant rise in Treasury issuance. Treasury debt outstanding grew from $4.5 trillion in 2007 to $11.3 trillion by the end of 2012. The Congressional Budget Office (CBO) projects an additional 68 percent increase to $18.9 trillion over the next ten years. Source: SIFMA, Congressional Budget Office. Data as of 12/31/2012.
$20Tn
$15Tn
$10Tn
$5Tn
19881984 1992 1996 2000 2004 2008 2012 2016 2020 2022
162%46%2001 – 2006 2007 – 2012
68%projected
$0Tn1980
The Impact of the Financial Crisis Rise in U.S. Treasury Debt Outstanding since the Financial Crisis
The Evolution of the Core Fixed-Income Universe Reweighting of the Universe toward Risk-Free Assets
The massive increase in Treasury debt has reshaped the core fixed-income universe. Since bottoming in 2007 at 19 percent of core bonds outstanding, Treasuries nearly doubled to 35 percent of the universe by 2012. Combined with agency debt, U.S. government assets now comprise almost two-thirds of the core fixed-income universe, and nearly 75 percent of the Barclays Agg. Source: SIFMA, Credit Suisse. Data as of 12/31/2012.
Treasuries Agency MBS Agency Bonds Investment-Grade Bonds Non-Agency MBS Taxable Municipals ABS
2012
34.5%
2007
19.0%
5 | THE CORE CONUNDRUM GUGGENHEIM PARTNERS
Fiscal Policy Reconfiguring
Composition of Barclays Agg
Since its creation in 1986, the Barclays U.S.
Aggregate Bond Index (the “Index” or the “Agg”)
has become the most widely used proxy for the U.S.
bond market with over $2 trillion in fixed-income
assets managed to it. Inclusion in the Agg requires
that securities be U.S. dollar-denominated,
investment-grade rated, fixed-rate, taxable, and
meet minimum par amounts outstanding. In 1986,
the fixed-income landscape primarily consisted of
U.S. Treasuries, agency bonds, agency MBS, and
corporate bonds – all of which met these inclusion
criteria. Therefore the Agg was a useful proxy for
the universe of fixed-income assets. However,
the fixed-income universe has evolved over the
past twenty years with the growth of sectors
such as asset-backed securities and municipals.
Over the past five years, the composition of the
Barclays Agg has been altered by the massive
volume of Treasuries issued in response to the
U.S. financial crisis.
The sheer glut of Treasuries and their increasingly
dominant representation in the Index is a trend
unlikely to reverse anytime soon. The need
to fund government shortfalls – present and
future – is astonishing. The U.S. Treasury debt
Currently, the Barclays Agg is the least attractive it has ever been as measured by yield per unit of duration. Given the Fed’s recent pledge to keep rates low at least until specific unemployment or inflation targets are reached, the Index’s unattractiveness from an investment standpoint is likely to continue in the near term. Source: Barclays. Data as of 12/31/2012.
Assessing the Relative Value of the Barclays Agg Historical Yield per Unit of Duration
1%
2%
3%
4%
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
0%
1976
0.3%12/31/2012
6 | THE CORE CONUNDRUM GUGGENHEIM PARTNERS
balance totaled $4.5 trillion in 2007. By the end
of 2012, it had skyrocketed to $11.3 trillion. Yet,
it is projected to go even higher – hitting $18.9
trillion by 2022, according to estimates from the
Congressional Budget Office. As Treasuries climbed
from 19 percent of the core fixed-income universe
to 35 percent over the last five years, the market-
capitalization weighted Agg has followed suit.
Treasuries currently comprise 37 percent of the
Agg, and combined with agency debt, total U.S.
government-related debt comprises nearly 75
percent of the Index with a weighted-average yield
of 1.6 percent, as of January 31, 2013.
Anchored to a benchmark heavily allocated to
sectors yielding negative real rates of return
has forced investors to reassess the traditional,
benchmark-driven approach to core fixed-income
management. While historically, core strategies
have had negligible exposure to leveraged credit,
emerging-market debt, and non-agency structured
credit – all of which are typically higher yielding
and commensurately, higher risk segments of the
fixed-income universe – this aversion to riskier
assets appears to be waning given the need for
yield. In the next section, we will analyze the
strategies being employed to generate yield, as
investors adjust to new market realities.
SectorWeight
0%
9%
6%
3%
18%
15%
12%
Barclays Agg 100.0%
Historical High
1.9%
7.3%
ABS 0.4%
Municipals 1.4%
CMBS 1.8%
Agency Bonds8.9%
Corporates 21.6%
Agency MBS 29.4%
Treasuries 36.6%
Historical Low Historical AverageCurrent
2.8%
1.0%
3.3%
1.8% 1.1%
2.5%
0.9%
5.0% 5.5% 5.5%
4.5%
8.0% 7.9%
6.6%
With the average yield of the Barclays Agg at 1.9 percent, and 75 percent of the Index allocated to Treasuries, agency MBS, and agency bonds, investors with minimum yield targets have nowhere to hide within the Index and benchmark-driven strategies may continue to fall short of the yield requirements for most institutional investors. Source: Barclays. Data as of 01/31/2013.
Scarcity of Yield across Fixed-Income Landscape Historically Low Yields across Traditional Core Sectors
7 | COPING WITH NEW MARKET REALITIES GUGGENHEIM PARTNERS
Prioritizing Yield Targets
For investors who service their cash liabilities
through the income stream generated from their
bond portfolios, relative performance to an Index,
that finished 2012 with a total return of 4.2 percent
and a yield of 1.7 percent, is of secondary impor-
tance, and in some cases, inconsequential. For
institutional investors, such as insurance companies,
pension funds, and endowments, absolute yields
and returns are preeminently important. While
several prominent pension funds recently lowered
portfolio return estimates by 25 to 50 basis points,
these diminutive cuts appear largely symbolic
in nature as they fail to address the investment
shortfall concerns emanating from this persistent,
low-rate environment. Despite historically low yields,
materially lowering investment return targets is
simply not a viable option for particular investor
classes. As portfolio return targets remain unhinged
from current market yields, many investors have
begun assuming increased investment risks.
Demand for yield has precipitated a relaxation
in underwriting standards and eased the avail-
ability of credit. For example, during 2012, the
investment-grade and high-yield bond markets
set records for issuance. Particularly in the high-
yield market, there was a significant increase in
deals lacking covenant protection; volume from
lower-rated, first-time issuers; and aggressive deal
structures. The negative, long-term impact of
As institutional investors evaluate their need to generate yield, a softening
stance toward tracking error appears to be emerging, industry-wide.
Traditional yield enhancement techniques, such as increasing duration
and lowering credit quality, may boost total returns in the near term,
but at what cost? Currently, benign credit conditions may be over-
shadowing the potentially deleterious, long-term effects of higher
credit and interest rate risk.
Coping with New Market Realities
SECTION 2
8 | COPING WITH NEW MARKET REALITIES GUGGENHEIM PARTNERS
these worsening trends in new issuance is currently
being obscured by the benign credit environment,
a by-product of the Fed’s unprecedented monetary
accommodation. As the Fed begins the fifth year of
its zero-bound monetary policy, continued expec-
tations for low rates would appear to mitigate the
risk of extending duration in pursuit of incremental
yield. However, using historical precedent as our
guide, the market sometimes fails to effectively
discount the potential for sudden monetary
policy shifts.
Asymmetric Risk in Treasuries
During the 1940s, the Fed, acting in concert with
the Treasury Department, fixed interest rates on
short-term Treasury bills while committing to buy
long-term Treasury bonds in order to ensure cheap,
adequate financing for World War II and the
attendant recovery. The end of this practice, under
the Treasury Accord of 1951, led to a tumultuous
sell-off in longer-duration bonds as the market
failed to anticipate the shift in monetary policy.
Once the Fed inevitably begins removing excess
The removal of Fed support of bond prices at the long end of the curve in 1951 set off a bear market in bonds that lasted thirty years. Could history repeat itself once the current period of low rates ends? While we do not think this is imminently possible, future policy change is increasingly a concern. Source: Bloomberg. Data as of 12/31/2012.
Historically, the End of Fed Intervention is Bad News for Bonds U.S. 10-Year Treasury Yields since 1800
1%
3%
5%
7%
9%
11%
13%
15%
1800 1815 1830 1845 1860 1875 1890 1905 1920 1935 1950 1965 1980 1995 2010
10-Y
ear
Trea
sury
Yie
ld
1 2
Rate Stability
Bear Market in Bonds
Treasury Accord
9 | COPING WITH NEW MARKET REALITIES GUGGENHEIM PARTNERS
liquidity from the financial system, could a repeat
of the 1950s occur? While we do not envision any
sudden monetary policy shifts or a meaningful
rise in rates in the near term, given where rates
are today and how grossly overvalued Treasury
securities have become, the risk to rates is clearly
to the upside. At current coupon rates, a 20 basis
point rise in rates would result in a negative total
return on 10-year Treasuries over a one-year holding
period. Based on the asymmetrical risk-return
profile, we believe Treasuries have gone from
offering “risk-free returns” to now effectively
becoming “return-free risk.”
The dearth of yield within traditional core fixed-
income sectors has resulted in an uptick in tracking
error as investors increase allocations to riskier
investments, such as emerging-market bonds and
high-yield debt. According to eVestment Alliance,
the average tracking error for core fixed-income
strategies rose to 1.09 percent over the past three
years ending December 2012, compared to 0.66
percent in the three-year period from 2005 to 2007.
Given investors’ increased willingness to venture
outside the traditional confines of core fixed-income,
in the following section, we propose a more optimal
method to generate attractive yields without
sacrificing credit quality or extending duration.
Purchasing 10-year Treasuries at current yields comes with considerable duration risk. Today’s low coupon rates mean a 20 basis point rise in rates would lead to a negative total return over a one-year holding period. With the risk in Treasuries heavily skewed to the downside, we believe Treasuries have gone from offering “risk-free returns” to now effectively becoming “return-free risk.” Source: Bloomberg.
Data as 12/31/2012. The total return scenario is calculated based on the coupon rate of 1.625% and an effective duration of 9.1.
Era of “Return-Free Risk” U.S. 10-Year Treasury One-Year Holding Period Returns
U.S. 10-Year Treasury One-Year Holding Period Total Returns
Change in Interest Rates (Basis Points)
Nom
inal
Tot
al R
etur
n
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-150 -100 -50 0 100 150 200
A 20 basis point move in rates wipes away the total return in 10-year Treasuries
10 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS
Short-Duration Strategy
Predicated on our view that the risk to interest rates
is to the upside, we would advise investors to
shorten portfolio duration and look for innovative
ways to approach core fixed-income investing.
Shortening duration offers a buffer against rising
rates, but this generally comes at the expense
of yield, particularly in corporate credit securities.
The presumed positive correlation between yield
and duration in the investment-grade universe has
driven demand down the credit spectrum into
lower-rated, high-yield bonds. A broader investment
focus beyond the traditional core fixed-income
framework demonstrates that lowering duration
and producing attractive portfolio yields do
not necessarily have to be mutually exclusive
investment objectives.
Within the investment-grade universe, floating-rate
collateralized loan obligations (CLO) and short-
duration asset-backed securities (ABS) offer similar
yields to longer-dated corporate bonds with signific-
antly less interest rate risk. While traditional
securitizations of credit card receivables, student
loans, and auto loans represent the majority of the
ABS market, the sector has diversified into more
specialized, niche segments of securities backed
by various types of collateral, such as aircraft
and shipping container leases, timeshare vacation
ownership interests, and franchise fees. Largely
owing to its association with the subprime crisis,
these types of lesser-known, “orphan” credits suffer
from a lingering negative connotation. The illiquidity
and complexity of these non-traditional, “off-the-
run” sectors provide opportunities to generate yield
in excess of comparably rated corporate credits.
While corporate bond investors are exposed to the
credit risk of a specific issuer or entity, idiosyncratic
risks are mitigated in CLOs and ABS through large,
diversified collateral pools. Additionally, these
securities offer significant downside structural
protection during stressed economic environments
While it may seem that increased credit and duration risk have become
prerequisites to generate yield, there is a more sustainable, long-term
strategy that relies on the ability to uncover quality, investment-grade
opportunities outside of the traditional benchmark-driven framework.
Future Investment BlueprintSECTION 3
11 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS
through overcollateralization, excess spread,
reserve accounts, and triggers that cut off cash
flows to subordinated tranches. Lastly, the
amortizing structures of many asset-backed
securities reduce credit exposure over time,
while risks remain constant in corporate bonds
due to their bullet maturities.
Monetizing Complexity
Despite the generally positive credit fundamentals
in traditional ABS sectors, low nominal yields
decrease the attractiveness of these segments.
These traditional sectors, which represent the
lion’s share of the ABS exposure in the Barclays
Agg, have a weighted-average yield of 1.0 percent.
Yields on credit card ABS are currently below
1 percent, while yields on auto loans are between
1 and 2 percent. Although student loans offer
slightly higher yields of 2 to 4 percent, the
regulatory risk coupled with our belief that loan
prepayments will be low, which would extend
the average life of the securities to 10 to 15 years,
significantly reduce their relative attractiveness.
Relative Value of ABS and CLOs vs. Corporate Bonds Spread Comparison between BBB-AA-rated ABS, A-rated CLOs, and BBB-A-rated Corporates
CLO
ABS
Corporate
0bps
600bps
1,200bps
2002 2004 2006 2008 2010
1,500bps
1,800bps
2,100bps
900bps
300bps
2012
Largely owing to their association with the subprime crisis, CLOs and ABS frequently offer excess yield over corporate bonds given their increased complexity and illiquidity. Source: JP Morgan, Bank of America Merrill Lynch. Data as of 12/31/2012.
Spread High: Low: Avg: Last:
CLO 2,070 68 460 315
ABS 1,983 104 431 200
Corporate 710 87 199 163
12 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS
We believe CLOs and ABS backed by aircraft leases
are the two sectors currently offering the most
attractive relative value. CLOs are benefitting from
low bank loan default rates, healthier corporate
balance sheets, and robust new loan issuance
(nearly $300 billion in 2012). In the aircraft ABS
space, the recent wave of restructurings and
recapitalizations of U.S. airlines have resulted
in improved profitability and lower fixed costs.
Leasing rates have been supported through the
increased demand from airlines that have chosen
to lease rather than buy aircraft. In addition to
our favorable view on the underlying collateral,
aircraft ABS securities tend to be amortizing,
have shorter durations, and offer yields in excess
of 6 percent on senior BBB tranches – a premium
of almost 300 basis points over corporate bonds.
Due to the immense diversity and complexity
of CLOs and ABS, however, ascertaining relative
value requires in-depth analysis of both deal
structure and the underlying collateral.
Long-Duration Strategy
For investors who need to maintain longer asset
duration in order to match their liabilities, floating-
rate CLOs or short-duration ABS can be combined
with longer-duration, fixed-rate securities as part
of a barbell strategy. (“Barbell” means to structure
In the investment-grade complex, ABS is one sector offering leveraged credit-type yields without the commensurate credit risk. Additionally, the shorter duration of ABS securities relative to comparably rated corporate bonds offers greater protection against rising rates. Source: Bloomberg, Bank of America Merrill Lynch, Barclays. Data as of 12/31/2012. Willis Lease is a U.S. public company and a major lessor of spare aircraft engines. BCP is a leading commercial bank in Peru.
Discovering Yield in the Investment-Grade Universe New Issue, Esoteric ABS Provide Yield without Increased Credit and Rate Risk
0%
2%
4%
6%
8%
2 3 4 5 6 7 8
Yiel
d to
Wor
st
Duration
BofA ML ABSMaster BBB-AA Index
Barclays BBBCorporate Index
Barclays BCorporate Index
Barclays BBCorporate Index
Barclays U.S. Aggregate Bond Index (AA)
Barclays ACorporate Index
(A S&P / A Fitch)
Barclays AA Corporate Index
(A S&P / A Fitch)
13 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS
a portfolio with both short- and long-duration
securities in order to achieve a desired duration
target.) Utilizing this approach provides investors
with yield advantages while still meeting portfolio
duration objectives. With a barbell strategy, the
negative impact of rising rates on the longer-
duration, fixed-rate assets is partially offset by
the positive benefit of higher interest coupons
on floating-rate CLOs. In the case of ABS, shorter
maturities and principal amortizations allow
investors to reinvest proceeds at higher yields
if rates were to rise over an extended period.
To complement the short duration of ABS in the
barbell strategy, we prefer select, longer-dated,
taxable municipal bonds that offer yield premium
to Treasuries and agency debt. The political
uncertainty over the past several years, namely
the debt ceiling debate and the Fiscal Cliff, has
created attractive valuations in the municipal
market. As investors begin focusing on the real
economy and not the political economy, we believe
municipals are primed to benefit. According to
the Rockefeller Institute, state tax revenues have
grown for 10 consecutive quarters as employment
at the state and local government level has stabilized.
California, once the poster child for fiscal ineptitude,
is projecting an $850 million budget surplus for
full year 2014. A longer-term tailwind for municipal
credit fundamentals will be the continued
momentum of the housing sector. Home price
appreciation will eventually translate into higher
property tax assessments realized by local govern-
ments over the next several years.
Aside from these improving fundamental factors,
the municipal sector may also benefit from technical
catalysts. Building upon the record $50 billion in
mutual fund inflows in 2012, continued demand
for municipals will likely be aided by the expected
growth of the U.S. economy throughout 2013.
Increased Federal revenues may lead to a decline
in Treasury bond issuance, forcing investors into
other government-related alternatives such as
municipals and military housing. Our focus remains
on A-rated revenue bonds maturing within 20 years
that finance essential services, public universities
and transportation.
Active Management in Practice
With nominal coupons across the fixed-income
universe near historical lows, the opportunity cost
from employing a benchmark-driven, passively
managed strategy has increased dramatically. An
actively managed strategy provides the opportunity
to generate returns through targeted weightings
to attractively valued sectors. The volatility of sector
performance over the past few years, quantified
in the following table, underscores the importance
of active management.
Barbell means to structure a portfolio with both short- and long-duration securities in order to achieve a desired duration target. With a barbell strategy, the negative impact of rising rates on the longer-duration, fixed-rate assets is partially offset by the positive benefit of higher interest coupons on floating-rate securities.
14 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS
The Future of Core Fixed-Income
The traditional view of core fixed-income did not
include active duration management, increased
tolerance for tracking error, or significant allocations
to non-indexed sectors such as floating-rate CLOs
and “off-the-run” ABS. As the chasm between
investors’ return targets and current market yields
deepens, it is apparent that the traditional view of
core fixed-income management requires innovation.
The historically low-rate environment has intensified
the demand for absolute yield, antiquating investors’
historical focus on relative performance.
In pursuing yield targets, investors must not allow
short-term pursuits to derail long-term investment
objectives. We believe the global easing cycle will
continue to support a benign credit environment
over the next two to three years; however, the current
accommodative conditions are likely masking a
comprehensive appreciation of investment risks.
With nominal yields near historical lows, price performance is likely to become a larger component of total returns in the near term. Active asset allocation provides the opportunity for a portfolio to generate returns through increased weightings to attractively valued sectors and decreased weightings to overvalued asset classes. Source: Barclays, Credit Suisse. Data as of 12/31/2012.
Asset Allocation Matters, Particularly in Today’s Low Yield Environment Historical Annual Fixed-Income Sector Returns
2006 2007 2008 2009 2010 2011 2012
High Yield
11.8%Treasuries
9.0%Treasuries
13.7%High Yield
58.2%High Yield
15.1%Municipals
18.1%High Yield
15.8%
Leveraged Loans
7.3%Municipals
7.6%Municipals
7.0%Leveraged Loans
44.9%Leveraged Loans
10.0%Treasuries
9.8%IG Corporates
9.8%
ABS
4.7%IG Corporates
4.6%IG Corporates
-4.9%ABS
24.7%IG Corporates
9.0%IG Corporates
8.1%Municipals
9.6%
IG Corporates
4.3%ABS
2.2%ABS
-12.7%IG Corporates
18.7%Municipals
7.2%ABS
5.1%Leveraged Loans
9.4%
Municipals
3.2%Leveraged Loans
1.9%High Yield
-26.2%Municipals
0.7%Treasuries
5.9%High Yield
5.0%ABS
3.7%
Treasuries
3.1%High Yield
1.9%Leveraged Loans
-28.8%Treasuries
-3.6%ABS
5.9%Leveraged Loans
1.8%Treasuries
2.0%
15 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS
Given the overwhelming emphasis on total return,
investors must be vigilant in identifying the risks
involved in reaching for incremental yield, since
“not all yield is created equal.” Employing investment
shortcuts, such as increased credit or interest
rate risk, solely to generate yield may come at the
expense of future performance. Achieving yield
targets without assuming undue risk has proven
extremely difficult under the traditional framework.
We believe it is achievable under a broadened
investment framework.
By remaining tightly aligned to the Barclays Agg,
which is currently bloated with low-yielding
government-related debt, investors are giving up
the flexibility to take advantage of undervalued
sectors and underweight unattractive ones. In
a market coping with unprecedented monetary
conditions, we believe the surest path to underper-
formance is to remain anchored to outdated core
fixed-income conventions of the past.
U.S. Treasuries
Agency MBS
Agency Bonds
Corporates
RMBS
CMBS
Taxable Municipals
ABS
Weighted-Average Yield
0%
U.S. Treasuries
Agency MBS
Agency Bonds
Corporates
RMBS
CMBS
Taxable Municipals
ABS
Weighted-Average Yield
0%1% 2% 3% 4% 5% 1% 2% 3% 4% 5%
0.9% 1.0%
2.2% 2.3%
1.3% 2.3%
2.7% 4.2%
4.2%
n/a 5.0%
1.7%
1.7%
4.7%
3.2%
4.8%
0.9%
4.9%
With the traditional view of core fixed-income management quickly becoming antiquated in today’s low-yield environment, investors must begin looking forward towards the future of core fixed-income management. Source: Barclays, Guggenheim Investments. Data as of 12/31/2012. Sector allocations are based on the representative
account of the Guggenheim Core Fixed-Income Strategy and excludes cash.
The Changing of the Guard The Future of Core Fixed-Income Management
Traditional View: Barclays Agg
WEIGHT
U.S. Treasuries
Agency MBS
Agency Bonds
Corporates
RMBS
CMBS
Taxable Municipals
ABS
Weighted-Average Yield
0%
U.S. Treasuries
Agency MBS
Agency Bonds
Corporates
RMBS
CMBS
Taxable Municipals
ABS
Weighted-Average Yield
0%1% 2% 3% 4% 5% 1% 2% 3% 4% 5%
0.9% 1.0%
2.2% 2.3%
1.3% 2.3%
2.7% 4.2%
4.2%
n/a 5.0%
1.7%
1.7%
4.7%
3.2%
4.8%
0.9%
4.9%
74.7% gov.-related debt
YIELD
U.S. Treasuries
Agency MBS
Agency Bonds
Corporates
RMBS
CMBS
Taxable Municipals
ABS
Weighted-Average Yield
0%
U.S. Treasuries
Agency MBS
Agency Bonds
Corporates
RMBS
CMBS
Taxable Municipals
ABS
Weighted-Average Yield
0%1% 2% 3% 4% 5% 1% 2% 3% 4% 5%
0.9% 1.0%
2.2% 2.3%
1.3% 2.3%
2.7% 4.2%
4.2%
n/a 5.0%
1.7%
1.7%
4.7%
3.2%
4.8%
0.9%
4.9%
Future View: Guggenheim Core Fixed-Income
U.S. Treasuries
Agency MBS
Agency Bonds
Corporates
RMBS
CMBS
Taxable Municipals
ABS
Weighted-Average Yield
0%
U.S. Treasuries
Agency MBS
Agency Bonds
Corporates
RMBS
CMBS
Taxable Municipals
ABS
Weighted-Average Yield
0%1% 2% 3% 4% 5% 1% 2% 3% 4% 5%
0.9% 1.0%
2.2% 2.3%
1.3% 2.3%
2.7% 4.2%
4.2%
n/a 5.0%
1.7%
1.7%
4.7%
3.2%
4.8%
0.9%
4.9%
16.6% gov.-related debt
WEIGHT YIELD
16 | PORTFOLIO STRATEGY RESEARCH GUGGENHEIM PARTNERS
1 Assets Under Management(AUM) is as of 12.31.2012 and includes $10.71B of leverage. AUM includes assets from Security Investors, Guggenheim Partners Investment Management, LLC (“GPIM”, formerly known as Guggenheim Partners Asset Management, LLC; GPIM assets also include all assets from Guggenheim Investment Management, LLC which were transferred as of 06.30.2012), Guggenheim Funds Investment Advisors and its affiliated entities, and some business units including Guggenheim Real Estate, Guggenheim Aviation, GS GAMMA Advisors, Guggenheim Partners Europe, Transparent Value Advisors, and Guggenheim Partners India Management. Values from some funds are based upon prior periods.
Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC (“GP”): GS GAMMA Advisors, LLC, Guggenheim Aviation, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Investment Management, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners India Management, Guggenheim Real Estate, LLC, Security Investors, LLC and Transparent Value Advisors, LLC. Guggenheim Partners Investment Management, LLC (GPIM) is a registered investment adviser and serves as the adviser to the Core Fixed Income Strategy. GPIM is included in the GIPS compliant firm, Guggenheim Investments Asset Management, and is also a part of Guggenheim Investments. This material is intended to inform you of services available through Guggenheim Investments’ affiliate businesses.
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy.
Past performance of indices of asset classes does not represent actual returns or volatility of actual accounts or investment managers, and should not be viewed as indicative of future results. The benchmarks used are for purposes of comparison and should not be understood to mean that there will necessarily be a correlation between the portrayed returns herein and these benchmarks.
Past performance is not indicative of comparable future results. Given the inherent volatility of the securities markets, it should not be assumed that investors will experience returns comparable to those shown here. Market and economic conditions may change in the future producing materially different results than those shown here. All investments have inherent risks.
No representation or warranty is made to the sufficiency, relevance, importance, appropriateness, completeness, or comprehensiveness of the market data, information or summaries contained herein for any specific purpose.
© 2013 Guggenheim Partners LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners LLC.
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About Guggenheim Partners
About Guggenheim Investments
NEW YORK
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Guggenheim Investments represents the investment management division of Guggenheim Partners, which
consist of investment managers with approximately $143 billion in combined total assets.1 Collectively,
Guggenheim Investments has a long, distinguished history of serving institutional investors, ultra-high-net-
worth individuals, family offices, and financial intermediaries. Guggenheim Investments offers clients a wide
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