CATALYST FUNDS RESEARCH
The Case For Diversifying Your Fixed Income Exposure
Is your fixed income portfolio getting the benefits of diversification?
Is your fixed income portfolio getting the benefits of diversification?
February 2019 | Retail Version
Many bond portfolios consist of investments that replicate the AGG, which does not include about two-thirds of the investable fixed income space, leaving them under-exposed to the broader fixed income universe. The chart below shows that by diversifying fixed income exposure, investors could have achieved 29% more yield than the AGG with 31% less risk. Moreover, if investors held a diversified fixed income portfolio since the end of 2012, they would have a return 132% higher than the AGG.
A diversified portfolio offers more favorable characteristics than a traditional fixed income portfolio.
Daily Return Data (12/31/2012 to 1/31/2019)
Category | Yield to Worst | Annualized Return | Standard Deviation | Return/ Risk | Worst Drawdown |
Agg | 3.15% | 1.90% | 3.12% | 0.61 | -4.87% |
Investment Grade Corp | 3.91% | 2.82% | 4.14% | 0.68 | -6.44% |
Treasury | 2.59% | 1.53% | 5.21% | 0.29 | -8.87% |
Agency MBS | 3.28% | 1.97% | 2.60% | 0.76 | -4.05% |
High Yield | 6.90% | 5.12% | 3.62% | 1.41 | -12.94% |
Floating Rate <5 YR | 3.33% | 1.40% | 0.17% | 8.13 | -0.42% |
Non Agency MBS | 4.75% | 16.06% | 3.38% | 4.75 | -2.25% |
Non Agency CMBS | 3.58% | 2.45% | 2.74% | 0.89 | -4.87% |
Agg Like | 3.26% | 2.11% | 3.86% | 0.55 | -6.45% |
Diversified | 4.05% | 4.41% | 2.15% | 2.05 | -3.37% |
Historically, a diversified fixed income portfolio exhibits a favorable risk/return tradeoff compared to the AGG and AGG-Like investments.
![chart_research](https://catalystfunds.wpenginepowered.com/wp-content/uploads/sites/3/2019/02/chart_research.png)
A diversified fixed income portfolio provides the potential for attractive yield at risk levels lower than the AGG.
![chart_research2](https://catalystfunds.wpenginepowered.com/wp-content/uploads/sites/3/2019/02/chart_research2.png)
Source: Bloomberg LP. Non Agency MBS Yield to Worst estimated by Wynkoop, LLC.
Please note that diversification does not assure a profit or protect against loss in a declining market. The referenced indices are shown for general market comparisons and are not meant to represent any fund. Investors cannot directly invest in an index; unmanaged index returns do not reflect any fees, expenses or sales charges. Source: Bloomberg LP. Non Agency MBS Yield to Worst estimated by Wynkoop.
1 Agg Like portfolio represented by a blended portfolio (equally weighted and rebalanced daily) of Investment Grade Corp bonds, Treasury bonds, and Agency MBS.
2 Diversified portfolio represented by a blended portfolio (equally weighted and rebalanced daily) of Investment Grade Corp bonds, Treasury bonds, Agency MBS, High Yield bonds, Floating Rate < 5 YR bonds, Non Agency MBS, and Non Agency CMBS.
The Agg is represented by the Bloomberg Barclays US Aggregate Bond TR Index, Investment Grade Corp is represented by Bloomberg Barclays US Corporate Investment Grade USD TR Index, Treasurys are represented by Bloomberg Barclays US Treasury: 7-10 Year TR Index, Agency MBS is represented by Bloomberg Barclays US MBS Index Total Return, High Yield is represented by Bloomberg Barclays US Corporate High Yield TR, Floating Rate <5 YR is represented by Bloomberg Barclays US FRN <5 Years, Non Agency MBS is represented by Markit iBoxx Broad US Non-Agency RMBS USD, and Non Agency CMBS is represented by Bloomberg Barclays NonAgency CMBS TR Index. The AGG Like portfolio is represented by a blended portfolio (equally weighted and rebalanced daily) of Investment Grade Corp bonds, Treasury bonds, and Agency MBS. The Diversified Portfolio is represented by a blended portfolio (equally weighted and rebalanced daily) of Investment Grade Corp bonds, Treasury bonds, Agency MBS, High Yield bonds, Floating Rate < 5 YR bonds, Non Agency MBS, and Non Agency CMBS.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Catalyst Funds. This and other important information about the Catalyst Funds is contained in the prospectus, which can be obtained by calling 866-447-4228 or at www.CatalystMF.com. The prospectus should be read carefully before investing. The Catalyst Funds are distributed by Northern Lights Distributors, LLC, member FINRA/SIPC. Catalyst Capital Advisors, LLC is not affiliated with Northern Lights Distributors, LLC. 4306-NLD-2/20/2019
4317-NLD-2/21/2019