Andrew Feltus, CFAManaging Director, Co-Director of High YieldPortfolio ManagerAmundi Pioneer Asset Management

The Potential Benefits of DiversificationIn Fixed Income Portfolios

Agenda

• Market Beliefs• Fixed Income Goals• Fixed Income Index Characteristics• Active Universe Characteristics• Implications• Conclusion

Key Assumptions Regarding Financial Markets per CAPM (Capital Asset Pricing Model)

Financial Markets:• The future will resemble the past• Asset class returns revert to their means over the longer term• Markets are efficient, so tactical allocation does not add value• Market capitalization fixed income indices are efficiently constructed• Fixed income indices represent the best proxy for the investable universe• Markets are liquid

Role of Fixed IncomePursue primary goals:• Income• Diversification*/hedge versus

equities• Low volatility—anchor to portfolio

Pursue secondary goals:• Deflation protection• Preserve purchasing power

(inflation hedge)• Hedge liabilities

Implementation:• Two primary options of index

versus active

Recent experience has driven investors to expect income

Potential Key Risks:• Rise in interest rates• Credit risk, default rate rises• Liquidity

Source: Bloomberg Barclays and Bureau of Labor Statistics, December 31, 2017*Diversification does not assure a profit or protect against loss.

0%

5%

10%

15%

20%

25%

1981-1985

1986-1990

1991-1995

1996-2000

2001-2005

2006-2010

2011-2015

2016-2017

Bloomberg Barclays US Aggregate Bond IndexReturn (Annualized)CPI YOY

10 Year Treasury Yield

Broad Fixed Income Index Assumptions per CAPM (Capital Asset Pricing Model)

Broad Fixed Income Indices:• Offer sufficient risk factor and sector diversification, including major liquid sectors of

Treasuries, agency mortgage-backed securities and investment grade corporates• Represent a low-risk, low-cost default option for investors• Are investable• Have a static risk profile• Underlying securities are sufficiently liquid

Broad Market Fixed Income Indices – The Reality• Broad market indices offer minimal risk diversification• Broad market fixed income index risk is not static, and has increased significantly• Market-capitalization weighting favors largest debtors, encourages bubbles and

excessive leverage and misallocates capital• Fixed income valuations are driven by non-economic motives, including central banks

or liability-driven investors• Static, rules-based investing (index or regulation-driven) creates price overshoots on

upside and downside

• Pricing:• Index investor is price–taker in a market in which prices are negotiated• An index is not investable and is matrix-priced• Indexers favor most liquid issues, foregoing liquidity premium and potentially

increasing volatility

Undiversified Risk Exposures of the US and Global Aggregate Bond Indices

Source: Barclays Point as of December 31, 2017

-20

0

20

40

60

80

100

120

140

160

CTE

V Ba

sis

Poin

ts

Bloomberg Barclays US Aggregate Bond Index

It's All Duration

-20

0

20

40

60

80

100

120

Bloomberg Barclays Global Aggregate Bond Index

It's Currency and Duration

Index Risk is not Static: Highest Duration and Near Lowest Yield in History

Bloomberg Barclays US Aggregate Bond Index: Yield-to Worst versus Effective Duration

Bloomberg Barclays Global Aggregate Bond Index: Yield-to Worst versus Effective Duration

• Yield per unit of duration has declined dramatically• Beginning yield dominant factor for future returns

Source: Barclays as of January 31, 2018

0

1

2

3

4

5

6

7

8

Inde

x

BBG Barclays US Agg DurationBBG Barclays US Agg YTW

0

1

2

3

4

5

6

7

8

Inde

x

BBG Barclays Global Agg DurationBBG Barclays Global Agg YTW

Risk in Benchmark-Driven AllocationsIncreasing and significant government exposure

Source: Barclays Point as of December 31, 2017

ABS/CMBSYankees

Investment Grade Corporate

Agency MBS

Agencies

Treasuries

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

37.0%

28.1%

2.4%

21.5%

8.7%

2.4%

Tota

l U.S

. Gov

ernm

ent:

67%

Higher Credit Risk in Broad Market Index

AAA AA A Baa

26.1%9.1%

31.7%

10.0%

32.1%

37.1%

10.0%

43.8%

Proportion of BBB bonds has more than tripled since 1973

45%

Changes in the Quality of the Bloomberg Barclays Credit Index 1973-2017

Source: Bloomberg Barclays as of December 31, 2017

Profile:Fixed Income Market Investors• Global Central Banks

• Motivation from monetary policy, FX reserve management• Focus on Treasury/agency mortgage-backed securities market

• Insurance Companies• Risk-based capital rules drive forced selling of corporate downgrades to non-

investment grade• Corporate Pensions

• Goal to immunize pension obligations by investing in long duration corporates and Treasuries

• Corporate Offshore Cash• Tax policy has driven corporate investors to hold $1.4 trillion cash offshore• Repatriation will reduce demand for short corporates

• Profit-driven investors• Traditional asset managers

Source: Bloomberg View, The New US Tax Rules are a Gift to Europe, 1/17/18

Profile: Active US Fixed Income Investors

• Diverse risk exposures• Invest in both benchmark and non-benchmark sectors, opening opportunity set for

higher potential returns, while lower correlations dampen total volatility• Dynamic, not rules-based

• Responds to changing price of risk• Reacts to changing quantity of risk• Considers changing economic/market regimes• May benefit from mean-reversion of fixed income and rebalancing return

• Full menu of information items to determine allocations• Investor has role as price-setter

• Can invest in market with negotiated prices

Diverse Sectors Can Offer the Advantage of Lower Correlated Returns

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

1 US Treasuries 1.00

2 Agencies 0.93 1.00

3 Agency Mortgage-Backed Securities 0.8 0.86 1.00

4 Commercial Mortgage-Backed Securities -0.02 0.14 0.01 1.00

5 Investment Grade Corporates 0.43 0.58 0.53 0.48 1.00

6 Treasury Inflation-Protected Securities 0.54 0.61 0.61 0.42 0.68 1.00

7 Municipals 0.33 0.39 0.42 0.31 0.56 0.44 1.00

8 Non-Agency Asset-Backed Securities -0.38 -0.36 -0.25 0.42 0.18 0.15 0.14 1.00

9 High Yield -0.24 -0.02 0.03 0.72 0.65 0.47 0.33 0.51 1.00

10 Leveraged Bank Loans -0.45 -0.32 -0.16 0.54 0.4 0.27 0.26 0.71 0.85 1.00

11 Convertibles -0.29 -0.1 -0.05 0.57 0.54 0.34 0.23 0.43 0.87 0.75 1.00

12 Preferred Stock 0.03 0.12 0 0.51 0.52 0.29 0.3 0.16 0.51 0.29 0.53 1.00

13 International Bonds 0.49 0.59 0.49 0.3 0.53 0.56 0.28 -0.13 0.28 -0.02 0.23 0.33 1.00

14 Emerging Market Bonds 0.25 0.44 0.45 0.53 0.77 0.68 0.5 0.2 0.74 0.47 0.64 0.41 0.56 1.00

15 Event-Linked (Catastrophe) Bonds 0.06 0.07 0.06 0.18 0.22 0.16 0.18 0.23 0.22 0.27 0.21 0.09 0.09 0.18 1.00

Traditional Fixed Income Sectors

Non-Traditional Fixed Income Sectors

10-year correlations

Source: Barclays, BofA Merrill Lynch, JP Morgan, Morningstar as of 31 December 2017 Asset classes represented by the following indices: US Treasuries – Bloomberg Barclays US Treasury Index, Agencies - Bloomberg Barclays US Agency Index, Agency Mortgage-Backed Securities - Bloomberg Barclays US Agency Fixed Rate MBS Index, Commercial Mortgage-Backed Securities - Bloomberg Barclays CMBS Investment Grade Index, Investment Grade Corporates - Bloomberg Barclays US Corporate Investment Grade Index, Treasury Inflation-Protected Securities - Bloomberg Barclays US Treasury TIPS Index, Municipals - Bloomberg Barclays Municipal Index, Non-Agency Asset-Backed Securities – ICE BofAMerrill Lynch ABS Master Floating Rate Index, High Yield – ICE BofA Merrill Lynch US High Yield Index, Leveraged Bank Loans - Credit Suisse Leveraged Loan Index, Convertibles – ICE BofA Merrill Lynch All Convertible Index, Preferred Stock – ICE BofA Merrill Lynch Preferred Stock Index, International Bonds – Citi WGBI non USD Index, Emerging Markets Bonds – JPMorgan EMBI Plus Index, Event-linked (Catastrophe) Bonds – SwissRe Cat Bond Index

10 Years of Fixed Income Returns: Potential Benefits of Diverse Credit Exposures

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Non-US Corporate10.11%

US High Yield57.51%

Convertible16.77%

Municipal11.19%

UK Corporate21.1%

Convertible24.92%

Preferred13.68%

Preferred7.72%

US High Yield17.49%

Convertible16.03%

Municipal-3.95%

Convertible49.13%

US High Yield15.19%

Emerging Market Debt9.2%

Emerging Market Debt

18.04%

US High Yield7.42%

Municipal9.78%

Municipal3.3%

Convertible11.94%

UK Corporate15.11%

US Corporate-6.82%

Leveraged Loans44.87%

Preferred13.97%

US Corporate7.51%

US High Yield15.59%

Leveraged Loans6.15%

Convertible9.44%

Emerging Market Debt

1.82%

Leveraged Loans10.16%

Preferred12.03%

Preferred-8.99%

UK Corporate29.56%

Emerging Market Debt

11.83%

Non-US Corporate5.17%

Convertible14.96%

UK Corporate3.69%

US Corporate7.51%

Asset-Backed Securities

-0.54%

Emerging Market Debt

9.62%

Non-US Corporate10.33%

Emerging Market Debt-9.7%

Emerging Market Debt

25.95%

Leveraged Loans9.98%

UK Corporate5.1%

Preferred11.64%

Asset-Backed Securities

1.34%

Emerging Market Debt

6.15%

US Corporate-0.63%

US Corporate5.96%

Emerging Market Debt

8.29%Asset-Backed

Securities-24.27%

US Corporate19.76%

US Corporate9.52%

US High Yield4.38%

US Corporate10.37%

Preferred-0.94%

UK Corporate5.99%

Leveraged Loans-0.69%

Asset-Backed Securities

1.82%

US High Yield7.48%

US High Yield-26.39%

Municipal14.45%

UK Corporate5.45%

Preferred1.86%

Leveraged Loans9.43%

US Corporate-1.46%

US High Yield2.5%

Convertible-1.15%

Non-US Corporate1.81%

US Corporate6.48%

Leveraged Loans-28.75%

Preferred14.14%

Non-US Corporate5.21%

Leveraged Loans1.82%

Municipal7.26%

Municipal-2.89%

Leveraged Loans2.06%

US High Yield-4.64%

Preferred1.77%

Municipal5.45%

UK Corporate-34.34%

Asset-Backed Securities

9.09%

Asset-Backed Securities

4.8%

Asset-Backed Securities

0.55%

Asset-Backed Securities

2.95%

Non-US Corporate-4.56%

Asset-Backed Securities

1.55%

UK Corporate-4.97%

Municipal0.25%

Leveraged Loans4.12%

Convertible-35.73%

Non-US Corporate4.39%

Municipal2.25%

Convertible-5.18%

Non-US Corporate1.51%

Emerging Market Debt

-8.31%

Non-US Corporate-2.68%

Non-US Corporate-5.54%

UK Corporate-6.18%

Asset-Backed Securities

2.9%USD Returns. Performance data shown represents past performance. Past performance does not guarantee future results. Indices shown: ICE BofA Merrill Lynch Corporate Bond Master measures performance of the investment grade corporate bond market. ICE BofA Merrill Lynch Municipal Master Index, measures the performance of the overall municipal bond market. ICE BofA Merrill Lynch US High Yield measures performance of the US high yield bond market. S&P/LSTA Leveraged Loan, a commonly used benchmark for higher yielding, higher risk loans. ICE BofA Merrill Lynch US Preferred Stock Hybrid Security Index measures the fixed-rate preferred stock market. ICE BofA Merrill Lynch US Convertible Bonds Index measures the convertible bond market. Citi WGBI Non USD Index, measures the performance of Non-US investment grade bond issuance. JP Morgan EMBI Plus tracks the performance of the below- and borderline-investment-grade global debt markets denominated in the major developed currencies. Bloomberg Barclays Sterling Corporate Bond, measures the performance of the UK corporate market.Indices are unmanaged and their returns assume reinvestment of dividends and, unlike mutual fund returns, do not reflect any fees or expenses associated with a mutual fund. It is not possible to invest directly in an index. Diversification does not guarantee a profit or protect against a loss. Source: Amundi Pioneer Asset Management as at 31 December 2017

Active Risk Management:Expanded Opportunity SetThe US Core and Core Plus Universe

Government Investment Grade Credit

Mortgage-Backed Securities

Commercial Mortgage-Backed

Securities

Asset-Backed Securities Municipal Insurance-Linked

Securities

Floating-Rate Note

Treasury Inflation-Protected Securities

Sub Paper

Bank Loans

High Yield

Adjustable-Rate Mortgage

Collateralized Mortgage

Obligations

Residential Mortgage-Backed

Securities

Single-Family Residence

Floating-Rate Note

Source: Bloomberg Barclays

Overview of Structured Credit Structured

Residential Mortgage-

Backed Securities

Government

-Ginnie Mae-Federal National Mortgage

Association-Freddie Mac

Credit

-Prime-Alt-A

-Subprime-Single-Family

Residence-Nonperforming

Loan-Non-US

Asset-Backed Securities

Government

-Small Business Administration

-FNW

Credit

-Auto-Credit Card

-Student Loan-Esoteric

Commercial Mortgage-

Backed Securities

Government

-Ginnie Mae-Federal National Mortgage

Association-Freddie Mac

Credit

-Conduit-Small Balance-Unguaranteed

-Large Loan

Sources: ICE BofA Merrill Lynch and Bloomberg Barclays

Dynamic Allocation: Valuations and Fundamentals Drive Allocation Decision

0%

5%

10%

15%

20%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Defaults Spread

Current Option-Adjusted Spread: 329 basis points

Current Default Rate: 3.0%

Averages:Option-Adjusted Spread: 555 basis points

Default: 4.56%

US High Yield Spreads and Defaults

Sources: Moody’s, ICE BofA Merrill Lynch, Amundi Pioneer, January 31, 2018

Impact of Regime-Oriented Asset Allocation on Returns

Source: Journal of Portfolio Management, Winter 2018: Active Risk-Based Investing, Emmanuel Jurczenko and Jérôme Teiletche

Impact of Regime-Oriented Asset Allocation on Distribution of Returns

Source: JP Morgan Asset Management, Impact of Macro Shifts on Asset Class and Portfolio Performance, 2011

Dynamic Risk Allocation of Multisector; Index Remains Static

Source: Barclays Point and Amundi Pioneer, January 31, 2018

-15

35

85

135

185

235Ex-Ante Factor CTEV (bps/month) TIPS

DefaultIdiosyncraticEM/OtherAgency MBSNon-Agency SecHY/EquityVol/SS/Gov SpdOthers

Investment Grade

Curve

FX

Positioning for Rising Rate Environment• Interest rate factor positioning

• Relative short duration versus Index, barbelled yield curve and non-US sovereign exposures should help reduce exposure to rising rates in the US. Source of duration in credit versus Treasury sectors further reduces rate sensitivity

• Unconstrained duration approach may be suboptimal, because tends to increase exposure to high yield credit to offset negative carry

• Higher yield • Yield-to-maturity significantly higher than Index may help offset principal loss from

rising rates • Floating rate exposure

• Significant floating rate exposure may include bank loans, non-agency asset-backed securities, home equity loans and event-linked (catastrophe) bonds

• An underweight to most rate-sensitive assets• US government sector exposure significantly lower than Bloomberg Barclays US

Aggregate Index• An overweight to credit, particularly non-investment grade credit

• High yield has average 0.5 interest rate sensitivity, compared to US Treasuries

Will a Broad Fixed Income Index Approach Diversify Equity Risk?

Source:Bloomberg, Bloomberg Barclays, 12/31/17

-4

-2

0

2

4

6

8

10

12

14

16

-1.000

-0.800

-0.600

-0.400

-0.200

0.000

0.200

0.400

0.600

0.800

Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 Jan-13

Correlation between Bonds and Equities vs. Inflation

Bond-Equity Correlation, 3 Years CPI Inflation

Rolling 3-year Correlations Bonds and Equities; Equities and High Yield

0

0.2

0.4

0.6

0.8

1

Dec-99 Dec-04 Dec-09 Dec-14

Rolling 3-year Correlation between HY Spreads and Equities

-1.00

-0.50

0.00

0.50

1.00

Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 Jan-13

Rolling 3-year correlation between Bonds and Equities

Source: Bloomberg, Bloomberg Barclays and ICE BofA Merrill Lynch, 12/31/17

Implementation: Core-Satellite or Multi-Sector Manager?• Multi-sector manager

• Seek manager with proven skill in dynamic allocation• Pursue manager with deep skillset across broad range of fixed income sectors

• Core-satellite can result in inefficient, unintended risk allocation• Employ a multi-sector manager that can tailor risk for specific investor• Avoid sleeve sectors that may double up or cancel out risks

• Management and cost efficiency• Consider that fewer managers yields lower managerial oversight requirement• Explore cheaper access to satellite sectors (such as high yield, bank loans,

insurance-linked securities), with a multi-sector manager

Median Fixed Income Manager: Outperformed the Index in Rising Rate Periods; Modestly Lagged in Others

Source: Impact of Market Conditions on Bond Fund ManagersHarsh Parikhand, Frank J. Fabozzi , Winter 2018 Journal of Portfolio Management

Multi-Sector Fixed Income: Potential for Attractive Risk/Reward Profile Relative to Fixed Income Indices

Source: Amundi Pioneer Asset Management, and eVestment as of December 31, 2017 eVestment Alliance, LLC and its affiliated entities (collectively, “eVestment”) collect information directly from investment management firms and other sources believed to be reliable; however, eVestment does not guarantee or warrant the accuracy, timeliness or completeness of the information provided and is not responsible for any errors or omissions. Performance results may be provided with additional disclosures available on eVestment’s systems and other important considerations such as fees that may be applicable. All categories not necessarily included and may not equal 100%. Copyright 2012-2017 eVestment Alliance, LLC. All Rights Reserved.

10-Year Returns and Standard Deviation

Core Plus Category Average

Bloomberg Barclays 5-Year

Treasury Bellwether

Bloomberg Barclays Global Aggregate ex-USD

Bloomberg Barclays US Aggregate

Bloomberg Barclays US Corporate Investment …

Bloomberg Barclays US Mortgage-Backed

SecuritiesBloomberg Barclays US

Universal

ICE BofA Merrill Lynch BB-B US Cash Pay High Yield

Constrained

ICE BofA Merrill Lynch …

Citigroup 3-Month T-Bill

JPMorgan EMBI+

Agg 70/HY20/EM10

Agg 60/HY30/EM10

0

2

4

6

8

10

0 2 4 6 8 10 12

Important InformationAmundi Pioneer Asset Management is the US business of the Amundi Asset Management group of companies. Investment advisory services are offered through Amundi Pioneer Asset Management, Inc. and Amundi Pioneer Institutional Asset Management, Inc. (collectively “Amundi Pioneer”). Not all Amundi products and services are available in all jurisdictions.

The views expressed are those of Amundi Pioneer and are current through the date indicated on the material and are subject tochange at any time based on market or other conditions. Amundi Pioneer disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Amundi Pioneer strategies are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Amundi Pioneer strategy or portfolio. Future results may differ significantly from those stated.

This document does not constitute investment advice and does not take account of the investment objectives or needs of or suitability for a specific investor. Please seek professional advice before you invest.