The Importance of Diversifying Your Fixed Income Exposure

CATALYST FUNDS RESEARCH

The Importance of Diversifying Your Fixed Income Exposure:
Why Traditional Fixed Income Alone May No Longer Be Enough

February 2019

KEY TAKEAWAYS

Historically, traditional fixed income has acted as a counterbalance to equity exposure. This relationship broke down in 2018 for the first time in the history of the Barclay’s Agg Index going back to 1976.
Many bond portfolios are under-exposed to the broader fixed income universe. This is problematic as it could lead to a lack of diversification, which could result in higher risk and lower overall returns for investors.
Catalyst offers a few products that might be a good fit to diversify your bond holdings, including the Catalyst/CIFC Floating Rate Income Fund (CFRIX), the Catalyst Enhanced Income Strategy Fund (EIXIX), and the Catalyst/SMH High Income Fund (HIIIX).

For several decades, traditional fixed income products have performed well and acted as a counterbalance to equity portfolio exposure. Historically, during down or flat years for bonds, equities were up, thus balancing investors’ overall portfolios. However, this relationship broke down in 2018 for the first time in the history of the Barclay’s Agg Index going back to 1976, where bonds were mostly flat and equities and many categories had negative returns.

For the first time ever, we are in a post-quantitative easing environment, and we believe this is causing the breakdown of this relationship between traditional bonds and equities. There is now limited buffer for the Fed to lower rates. Furthermore, market turmoil could be caused by rates continuing to rise, meaning both traditional bonds and equities could decline together. One way for investors to mitigate some of this duration risk is to diversify their fixed income exposure with non-traditional fixed income funds to help them achieve their long-term investment goals. We believe non-traditional strategies such as high yield, MBS, or floating rate are well-positioned to avoid duration risk and perform well in this type of environment.

Historically, traditional fixed income has acted as a counterbalance to equity exposure. During 2018, this was not the case as traditional bonds were mostly flat and equities were down.

During Most Periods, When Traditional Bonds Performed Poorly, Equities Performed Well and Vice Versa
Based on data from January 1976 to December 2018.

Barclays Agg Return Range	Barclays Agg Average	S&P 500 TR Index Average
Less than -1%	-2.47%	16.85%
-1% to 1%	-0.09%	6.01%
1% to 5%	3.65%	16.63%
5% to 10%	7.62%	7.54%
10% to 15%	12.14%	0.16%
Greater than 15%	17.24%	34.02%

S&P 500 TR Return Range	S&P 500 TR Index Average	Barclays Agg Average
Less than -30%	-37.00%	5.24%
-15% to -30%	-22.10%	10.25%
-5% to -15%	-10.50%	10.04%
-5% to 5%	0.37%	2.81%
5% to 15%	9.95%	6.18%
15% to 30%	24.95%	4.46%
Greater than 30%	33.10%	11.33%

For The First Time Ever Since 1976, Bonds and Equities Did Not Counterbalance Each Other
Based on data from January 1976 to December 2018.

	Barclays Agg	S&P 500 TR Index
1994	-2.92%	1.32%
1999	-0.82%	21.04%
2013	-2.02%	32.39%
2015	0.55%	1.38%
2018	0.01%	-4.38%

Note that diversification does not guarantee a profit or protect against a loss in a declining market.

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4710-NLD-5/21/2019

CATALYST FUNDS RESEARCH