Active Fixed Income
Redeploy cash as rates begin to drop
Bonds have historically outperformed cash in falling rate environments.1
Bonds have historically outperformed cash in falling rate environments.1
Despite the perceived protection from volatility, fleeing to cash or keeping too much cash on the sidelines may produce lower returns versus maintaining a diversified portfolio over the long term.
Victory Income Investors has been managing fixed income portfolios for over 50 years and has built a framework designed to help investors determine the best way to invest in fixed income for their goals.
All portfolios should be well-diversified. A well-diversified fixed income portfolio could help investors achieve their capital preservation, income generation and/or additional diversification goals.
It all depends on your fixed income framework. For example, start with a diversifier, like a core or core-plus product, and then align to your goals and risk tolerance.
Consider these potential fixed income portfolio building blocks.
This could be an intermediate core or core plus product depending on risk tolerance. Core holdings typically provide diversification to equities.
Adding a capital preserver, such as a short-term bond fund, can lower overall portfolio duration and fine-tune the portfolio to potentially mitigate interest rate risk.
Adding additional fixed income products can then be used to seek specific objectives. The above portfolio prioritizes yield and/or income with an income generator.
Portfolio construction can also account for expected changes in rates, which will vary based on the direction and magnitude of rate movements. The above portfolio is positioned with the expectation that rates will rise.
Now that you have an idea of a possible framework for building a fixed income portfolio, you can start customizing based on your own goals and priorities. Select a priority below to learn more.
Diversification: Fixed Income portfolios built to prioritize diversification tend to include a varied exposure to credit risk, interest rate risk, and fixed income asset classes. Investors looking for a balanced approach could start here.
Income: Starting yields are indicative of potential future returns, so if your goal is to maximize the income your fixed income portfolio can offer, it may be beneficial to build your portfolio around yield. Introducing products like high-yield corporate bonds or investment grade corporate bonds to supplement your core holdings, can increase return potential but does invite additional credit and/or interest rate risk. Here’s an example:
Capital Preservation: Portfolios built with the goal of principal preservation and loss prevention tend to operate on shorter time horizons and have lower interest rate risk. Starting with a diversified core product and customizing with short-term products with lower interest rate risk may help investors preserve hard-earned capital.
Diversification: Fixed Income portfolios built to prioritize diversification tend to include a varied exposure to credit risk, interest rate risk, and fixed income asset classes. Investors looking for a balanced approach could start here.
Income: Starting yields are indicative of potential future returns, so if your goal is to maximize the income your fixed income portfolio can offer, it may be beneficial to build your portfolio around yield. Introducing products like high-yield corporate bonds or investment grade corporate bonds to supplement your core holdings, can increase return potential but does invite additional credit and/or interest rate risk. Here’s an example:
Capital Preservation: Portfolios built with the goal of principal preservation and loss prevention tend to operate on shorter time horizons and have lower interest rate risk. Starting with a diversified core product and customizing with short-term products with lower interest rate risk may help investors preserve hard-earned capital.
For illustrative purposes only; not a recommendation of any specific security or investment strategy.
Overall Morningstar RatingTM
Overall Morningstar RatingTM
Overall Morningstar RatingTM
Overall Morningstar RatingTM
Overall Morningstar RatingTM
Overall Morningstar RatingTM
We construct portfolios using our core competencies in evaluating, taking and managing credit risk with the goal of producing above-market returns over the three- to five-year period.
1eVestment database. 2Track record in the US Core Plus space
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1Source: Bloomberg. Based on average annualized returns for cash, as represented by the Bloomberg U.S. Treasury Bill: 1-3 Months Index, and bonds, as represented by the Bloomberg U.S. Aggregate Index, for the 1 and 3-year periods following the last rate hike for the last four rate hiking cycles between February 1995 and December 2019.
2Source: Bloomberg. Based on monthly interest of cash, as represented by the Average 1YR CD Rate – YoY CPI, and bond yields, as represented by Yield to Worst of U.S. Aggregate Bond Index - CPI versus the rate of inflation, as represented by the CPI - YoY, Consumer Price Index, from February 2004 through February 2024.
Carefully consider a fund's investment objectives, risks, charges and expenses before investing. To obtain a prospectus or summary prospectus containing this and other important information, visit vcm.com/prospectus. Read it carefully before investing.
All investing involves risk, including the potential loss of principal.
In addition to the normal risks associated with investing, fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. Bonds and bond funds will decrease in value as interest rates rise and vice versa. Credit risk refers to the possibility that debt issuers may not be able to make principal and interest payments or may have their debt downgraded by ratings agencies.
ETF redemptions are limited and commissions are often charged on each trade. ETFs may trade at a premium or discount to their net asset value.
ETFs have the same risks as the underlying securities traded on the exchange throughout the day. High yield securities may be more volatile, be subject to greater levels of credit or default risk and may be less liquid and more difficult to sell at an advantageous time or price than higher-rated securities of similar maturity.
Diversification does not promise any level of performance or guarantee against loss of principal.
The value of your investment is also subject to geopolitical risks such as wars, terrorism, environmental disasters, and public health crises; the risk of technology malfunctions or disruptions; and the responses to such events by governments and/or individual companies.
“Core” and “Plus” are terms used in the investment industry to describe investment strategies. Generally, core strategies focus on investment-grade corporate and government bonds. Plus strategies typically add additional fixed income sectors including high yield, emerging markets, leveraged loans and non-U.S. currencies, which seek to improve income or return profiles by taking on additional risk.
The Victory Income Investors internal rating is compared to the Moody’s rating if Moody’s rates the bonds. If Moody’s does not rate the bond, then the internal rating is compared to the S&P rating. If neither Moody’s nor S&P rate the bond, then the internal rating is compared to the Fitch rating. The bond is considered not rated by a NRSRO if neither Moody’s, S&P or Fitch rate the bond.
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The Morningstar RatingTM for funds, or “star rating,” is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed- end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales loads. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
Fund performance used for the rankings reflects certain fee waivers, without which, Morningstar rankings would have been lower and Morningstar ratings may have been lower.
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