Evaluating Fixed Income Through the Lens of Your Goals

KEY TAKEAWAYS

·         The year 2020 saw stark differences in returns between fixed income categories—some of the largest in history.

·         This unprecedented return dispersion is a reminder that fixed income asset classes can behave very differently, so allocations should be tailored to an investor’s goals.

·         A one-size-fits-all approach to fixed income may lead to suboptimal results.

The first half of 2020 saw nearly unprecedented return dispersion across certain segments of fixed income. Globally, government bonds strongly outperformed corporate bonds in the first quarter. In particular, the spread in first-quarter returns between US Treasuries and US corporates was more than 11 percentage points, the largest quarterly return difference between the two in a sample going back a half century. Of course, the second quarter saw a sharp bounce-back for US credit, with US corporates outperforming US Treasuries by more than 7.7 percentage points. Historically, this represented the second-largest quarter of outperformance for US credit.

These outcomes are a reminder that fixed income asset classes can behave very differently, and that the choice of fixed income should be tailored to one’s specific needs and goals. This also implies that the framework for evaluating fixed income should be dictated by one’s goals. For example, the characteristics of a fixed income strategy that appeals to investors eyeing capital preservation may differ substantially from those of a strategy seeking to manage future cash flow liabilities. One’s investment goals should drive the evaluation process in fixed income investing. Three case studies illustrate this principle.

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Evaluating Fixed Income Through the Lens of Your Goals

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

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