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FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC VIEWING OR DISTRIBUTION.
The 5% ProblemDouble Jeopardy for Traditional Bond Investors
Nicholas Millikan, CAIAInvestment Specialist
1
FOR INSTITUTIONAL USE ONLY. The 5% Problem 2
1. The bull market in bonds may be winding down
2. Higher interest rates may be accompanied by excessive risk
3. Rates cannot go much lower
4. Flows to bond funds have reached unprecedented levels
5. Alternative sources of yield are looking more attractive
Why Reconsider Your Income Strategy: The 5% Problem
FOR INSTITUTIONAL USE ONLY. The 5% Problem 3
A Bond Bull Market for More than Three Decades
Source: Ibbotson AssociatesBonds = Ibbotson Associates SBBI U.S. Intermediate-Term Government Bond IndexPast performance does not guarantee future results.
FOR INSTITUTIONAL USE ONLY. The 5% Problem 4
Source: Investment Company Institute, 12/31/12
Investors Have Gravitated to Bonds Despite Falling Yields
FOR INSTITUTIONAL USE ONLY. The 5% Problem 5
Source: Ibbotson Associates, 01/31/13Past performance does not guarantee future results.
Real Treasury Yields Have Dipped Below Zero
FOR INSTITUTIONAL USE ONLY. The 5% Problem 6
Beyond the Bond: Three Alternative Income Strategies as Price Risk LoomsMinyanville, April 9, 2013
Headlines on Unsettled Bond Markets
How to rate-proof your fixed income strategy
Citywire Wealth Manager, April 9, 2013
Fixed Income: Out of the Frying Pan, Into the Fire
Yahoo! Finance, April 9, 2013
Billionaire Wilbur Ross: Long Term Bonds Are a ‘Huge
Risk’CNBC, March 22, 2013
Fixed Income: Fewer Places To Hide
Seeking Alpha, March 15, 2013
FOR INSTITUTIONAL USE ONLY. The 5% Problem 7
Note: Assumes 39.6% Federal and 3.8% Affordable Care Act tax rate; does not include state/local taxes.Sources: Asset classes in the chart above are represented by the following indexes: Muni High-Yield—Barclays High-Yield Municipal Bond Index; U.S. Corp High-Yield—Barclays U.S Corporate High-Yield Index; Municipal Bond—Barclays Municipal Bond Index; U.S. Mortgage-Backed Securities—Barclays U.S. Mortgage Backed Securities Index; U.S. Credit—Barclays U.S. Credit Index; U.S. Treasury—Barclays U.S. Treasury Index.Past performance does not guarantee future results.
Risks from Higher Interest Rates May Exceed Potential for Reward
FOR INSTITUTIONAL USE ONLY. The 5% Problem 8
Source: Ibbotson Associates, 12/31/12Stocks = S&P 500 Index, Bonds = Ibbotson Associates SBBI U.S. Intermediate-Term Government Bond IndexPast performance does not guarantee future results.
Diminished Return Spreads Point to a Bond Market Shift
FOR INSTITUTIONAL USE ONLY. The 5% Problem 9
Source: BloombergPast performance does not guarantee future results.
Dividend Stocks: An Important Source for Yield
S&P 500 Earnings Yield – 10 Yr Treasury Yield12/31/69 – 12/31/12
S&P 500 Dividend Yield – 10 Yr Treasury YieldAdjusted for Inflation12/31/69 – 12/31/12
-1000.0%
-800.0%
-600.0%
-400.0%
-200.0%
0.0%
200.0%
400.0%
600.0%
800.0%
-1000.0%
-800.0%
-600.0%
-400.0%
-200.0%
0.0%
200.0%
400.0%
600.0%
800.0%
FOR INSTITUTIONAL USE ONLY. The 5% Problem 10
Source: U.S. Treasury, Ibbotson Associates, 12/31/12Past performance does not guarantee future results.
Public Debt and Yields Tightly Correlated
FOR INSTITUTIONAL USE ONLY. The 5% Problem 11
Bond Macro Market Outlook
1. Shift in 10-year Treasury relative performance of stocks and bonds1
2. Extreme optimism in the form of historically high bond fund inflows2
3. Negative real yields on the 10-year Treasury3
4. Stabilizing housing prices4
5. Improving employment5
6. Slowing of personal, government and corporate deleveraging6
7. Historically high earnings and dividend yield relative to the 10-year Treasury7
1. Source: Ibbotson Associates, 12/31/122. Source: Investment Company Institute, 12/31/123. Source: Ibbotson Associates, 12/31/124. Source: Bloomberg, 12/31/125. Source: Bureau of Labor Statistics, 12/31/126. Source: U.S. Treasury, Ibbotson Associates, 12/31/127. Source: Ibbotson Associates, 12/31/12
FOR INSTITUTIONAL USE ONLY. The 5% Problem 12
Reasons to Cast a Wider Net for Income
1. With yields near record lows, traditional bond strategies are failing to meet investor needs.
2. Long-only bond portfolios are vulnerable to rising interest rates and inflation.
3. Only time will tell if the bond bull market is truly over.
4. A diversified approach to investment income makes sense in any market climate.
5. Investors need dynamic asset allocation that is responsive to global trends.
FOR INSTITUTIONAL USE ONLY. The 5% Problem 13
1. Based on Ibbotson Time Series2. Based on S&P 500 Index3. Based on Ibbotson Time Series for Japanese long-term government bonds4. Adjusted for 4.7% inflation5. Ibbotson Associates SBBI U.S. Intermediate-Term Government Bond IndexSource: Ibbotson. Associates, as of 12/31/12.Past performance does not guarantee future results.
A Diversified Income Portfolio Did Well in Historical Testing
Annualized Total
Return
Annualized Income Return
Standard Deviation
Maximum Drawdown
Sharpe Ratio
High-Yield Corporate Bonds 1 5.9% 4.7% 8.3% -25.2% 0.3
Dividend-Paying Stocks 2 12.4% 4.6% 15.4% -42.6% 0.59
Foreign Bonds 3 9.3% 7.0% 9.8% -36.3% 0.60
Total for Diversified Income Portfolio4 7.4% 5.4% 7.9% -23.8% 0.51
Traditional Bonds5 3.4% 4.6% 4.4% -8.9% -0.00
Inflation 4.7%
Historical Asset Class Performance During the 1941-81 Bond Bear Market January 1, 1941—December 31, 1981
FOR INSTITUTIONAL USE ONLY. The 5% Problem 14
Rethinking an Income Allocation Strategy
Treasuries and short-term bonds can still be part of a diversified strategy.
They offer:
• Capital preservation
• Income stability
Shifting some assets from Treasuries to a flexible, tactical approach means investing across a variety of sectors, securities, and strategies:
• Municipal bonds
• Corporate and high yield bonds
• Dividend stocks
• Global stocks and bonds
• REITs
• Active risk management with ability to sell short
• Consistency of payments
• Possible tax benefits
FOR INSTITUTIONAL USE ONLY. The 5% Problem 15
Discover More About the 5% Problem
Investors have been conditioned to believe that traditional bonds are safe and can deliver 5% annualized yields over the long term.
In the current climate, neither may be true. To learn more, download out new white paper, The 5% Problem: Double Jeopardy for Bond Investors, at www.forwardinvesting.com or call us at (888) 312-4100.
FOR INSTITUTIONAL USE ONLY. The 5% Problem 16
Important Information
You should consider the investment objectives, risks, charges and expenses of the Forward Funds carefullybefore investing. A prospectus with this and other information may be obtained by calling (800) 999-6809or by downloading one from www.forwardinvesting.com. It should be read carefully before investing.
RISKSThere are risks involved with investing, including loss of principal. Past performance does not guarantee futureresults, share prices will fluctuate and you may have a gain or loss when you redeem shares.
Alternative strategies typically are subject to increased risk and loss of principal. Consequently, investments such as mutual funds which focus on alternative strategies are not suitable for all investors.
Diversification and asset allocation do not assure profit or protect against risk.
There is no guarantee the companies in our portfolio will continue to pay dividends.
Nathan Rowader is a registered representatives of ALPS Distributors, Inc. Forward Funds are distributed by Forward Securities, LLC.
Not FDIC Insured | No Bank Guarantee | May Lose Value
FWD004599 013114