Re‑Evaluating Fixed Income Risks Amid Increased Market Volatility: An Analysis of RIA Portfolios

The risks of fixed income funds and portfolios are not always well understood by their investment categories or sector allocations alone.
Intended for investment professional use only

As market volatility continues to unnerve investors, we observe many Registered Investment Advisers (RIAs) re-evaluating their approaches to fixed income. Most RIAs tell us they still seek the traditional benefits of fixed income: capital preservation, equity risk diversification and an attractive yield. However, it has been challenging to achieve all three simultaneously in the current market environment amid historically low yields, rising U.S. rates and policy divergence that has exacerbated market volatility.

We regularly conduct customized studies for RIAs, and when we analyzed trends across 143 such studies during the second half of 2015, we found that many RIAs have opted to stretch for yield in an environment of low returns. This trend takes multiple forms, including expanded exposure to multi-sector credit portfolios, reassessing the role of nontraditional bond managers and resizing allocations to diverse global fixed income strategies. While this positioning may be desired, careful implementation is critical when assessing an increasingly diverse array of strategies to avoid leaving clients exposed to hidden risks.

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The Author

Kevin Winters

Alternatives Strategist

Justin Blesy

Asset Allocation Strategist

Ryan McMahon

Global Wealth Management



¹Risk factors are the underlying exposures within asset classes which justify a return premium and drive variations in returns. Examples of fixed income risk factors include duration (estimated portfolio movements to changes in interest rates) and credit spread duration (estimated portfolio movements to changes in credit spreads).

²5 December 2011 to 31 December 2015, representing maximum period of data availability.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Management risk is the risk that the investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing the strategy. Investors should consult their investment professional prior to making an investment decision.

This article contains hypothetical analysis and is being provided for illustrative purposes only. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown. Hypothetical or simulated performance results have several inherent limitations. Unlike an actual performance record, simulated results do not represent actual performance and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated performance results and the actual results subsequently achieved by any particular account, product or strategy. In addition, since trades have not actually been executed, simulated results cannot account for the impact of certain market risks such as lack of liquidity. There are numerous other factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results.

This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. It is not possible to invest directly in an unmanaged index. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2016, PIMCO