Equity investors can put their money to work across nine style boxes (think of the large-mid-small/growth-core-value matrix). That’s some diversification potential. Why is it then that some investors only have one flavor of fixed income in their portfolios?
Why would investors demand nine styles of equity, but seldom have more than one fixed income allocation – usually a core or core-plus strategy benchmarked to something like the Barclays Aggregate Index? Read more
In a perfect world, a diversified portfolio would have asset classes that are uncorrelated, allowing an investor to maximize return while minimizing risk. As every high yield portfolio manager has probably told you, high yield bonds have had low correlations with other asset classes, and they can offer attractive risk-adjusted returns. This low level of correlation has allowed investors to benefit from allocating to high yield bonds. According to Barclays, monthly high yield bond-return correlations have been negative versus U.S. Treasurys over the past twenty years. Obviously, that correlation statistic includes a time period of declining Treasury rates.
So what have correlations done during the most recent increase in rates?
Despite what feels like a 1.00 (perfectly positive) correlation to rates, high yield bond daily-return correlations to the Barclays U.S. Treasury 5-7 Year Index since May 1 are elevated, but still remain relatively low, only 0.20 (unless otherwise noted, all performance information is as of August 27, 2013). Read more