Investment Education

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Introduction to Bonds
Understanding Inflation

Understanding Inflation

Understanding Inflation

Inflation affects all aspects of the economy, from consumer spending, business investment and employment rates to government programs, tax policies, and interest rates. Understanding inflation is crucial to investing because inflation can reduce the value of investment returns.

Understanding Alternative Investments
Across the Spectrum: Understanding Public and Private Credit
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Sustainable Investing: Understanding ESG in Bonds
Understanding Preferred Securities
Understanding Hedged Share Classes
Understanding Green, Social and Sustainability Bonds

Risk Factor Diversification

Risk Factor Diversification

Traditional portfolio construction approaches, which focus on asset class diversification, may fall short of investors’ goals. A more efficient diversification strategy may be to allocate across the underlying “risk factors.”

Interest Rate Swaps

Interest Rate Swaps

Interest rate swaps have become an integral part of the fixed income market. These derivative contracts, which typically exchange – or swap – fixed-rate interest payments for floating-rate interest payments, are an essential tool for investors who use them in an effort to hedge, speculate, and manage risk.

Inflation-Linked Bonds (ILBs)

Inflation-Linked Bonds (ILBs)

Inflation-linked bonds, or ILBs, are securities designed to help protect investors from inflation. Primarily issued by sovereign governments, such as the U.S. and the UK, ILBs are indexed to inflation so that the principal and interest payments rise and fall with the rate of inflation. Inflation can significantly erode investors’ purchasing power, and ILBs can potentially provide protection from inflation’s effects. ILBs may also offer additional benefits in a broader portfolio context.

High Yield Bonds

High Yield Bonds

High yield bonds – defined as corporate bonds rated below BBB− or Baa3 by established credit rating agencies – can play an important role in many portfolios. They typically offer higher coupons than government bonds or high grade corporate bonds (or, corporates) and have the potential for price appreciation in the event of an improvement in the economy, or performance of the issuing company (of course, if these conditions worsen, then prices can also go down). Because the high yield sector generally has a low correlation to other sectors of the fixed income market along with less sensitivity to interest rate risk, an allocation to high yield bonds may provide portfolio diversification benefits. In addition, high yield bond investments have historically offered similar returns to equity markets, but with lower volatility.

The chart depicts examples of how hedging effectiveness varies depending on market scenario. It outlines most effective and least effective environment for correlation-based hedges (long Treasuries, trend following, alternative risk premia) and direct hedges (tail risk).

Duration

Duration

Most bond investors know that interest rate changes can affect the value of their fixed income holdings. How a bond or bond portfolio’s value is likely to be impacted by rising or falling rates is best measured by duration.

Currencies

Currencies

The currency market is the largest and most liquid financial market in the world. Currencies like the U.S. dollar, the British pound and the euro trade in the foreign exchange (FX) market 24 hours a day, fluctuating in value relative to each other almost constantly – and there are several paths to potential profits in the FX market.

Credit Default Swaps

Credit Default Swaps

Originally formed to provide banks with the means to transfer credit exposure, CDS has grown as an active portfolio management tool. The performance of CDS, like that of corporate bonds, is closely related to changes in credit spreads. This makes them an effective tool for hedging risk, and efficiently taking credit exposure.

Corporate Bonds

Corporate Bonds

After government bonds, the corporate bond market is the largest section of the global bond universe. With a vast array of maturities, yields and credit quality available, investing in corporate bonds has the potential to provide higher yields than government bonds and diversification benefits for investors.

Commodities

Commodities

Commodities are a distinct asset class with returns that are largely independent of stock and bond returns. Therefore, adding broad commodity exposure can help diversify a portfolio of stocks and bonds, potentially lowering the risk of an overall portfolio and boosting returns. Given their impact on consumer goods prices, commodities can also offer a hedge against inflation.

Bonds

Bonds

The bond market is by far the largest securities market in the world, providing investors with virtually limitless investment options. Many investors are familiar with aspects of the market, but as the number of new products grows, even a bond expert is challenged to keep pace. Once viewed as a means of earning interest while preserving capital, bonds have evolved into a $100 trillion global marketplace that can offer many potential benefits to investment portfolios, including attractive returns. Before tackling the complexities of this huge and diverse market, it is important to understand the basics: What is a bond and how can bonds help meet your investment goals?

Benchmarks

Benchmarks

A benchmark serves a crucial role in investing. Often a market index, a benchmark typically provides a starting point for a portfolio manager to construct a portfolio and directs how that portfolio should be managed on an ongoing basis from the perspectives of both risk and return. It also allows investors to gauge the relative performance of their portfolios.

5 Myths About Alternative Investments