In a low interest rate environment, financial professionals looking to add yield and enhance returns in their fixed income allocations have turned to plus sectors. Our analysis indicates that increased allocations to fixed income plus sectors in model portfolios reduced interest rate risk exposure at the expense of increased exposure to credit and other risks, resulting in additional volatility and portfolios that may not be aligned with their clients’ risk tolerance. T. Rowe Price research suggests that allocating 70% of total fixed income exposure to core assets and 30% to a mix of strategies, including plus sectors, may help to minimize key portfolio risks and maximize risk‑adjusted returns. Matching your portfolios’ fixed income allocations to your clients’ needs is a complex challenge that requires a flexible, dynamic approach. Portfolio Construction Solutions from T. Rowe Price can help you maximize your clients’ opportunities for financial success.
Core vs. Plus Fixed Income: “Core” and “plus” are terms used in the investments industry to describe two types of fixed income investment strategies. Core generally refers to fixed income investment strategies that focus on investment-grade corporate and government bonds. A plus strategy adds additional fixed income sectors like high yield bonds, emerging market bonds, and floating rate bank loans in an attempt to improve income or return potential in exchange for a higher risk profile.
Risks: Investing involves risk, including loss of principal. Diversification neither assures a profit nor eliminates the risk of experiencing investment losses. Fixed income securities are subject to credit risk, inflation risk, liquidity risk, call risk, and interest rate risk. As interest rates rise, bond prices generally fall. Investments in high yield (junk) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Bank loans are subject to credit risk and liquidity risk. Emerging market investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates; differences in market structure and liquidity; as well as specific country, regional, and economic developments.
Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
This material is provided for general and educational purposes only and not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making.
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