Fixed-income investing is a cornerstone of many portfolios, offering the potential for stability, income generation, and reduced volatility. One such fixed-income strategy is the Hemispheres Core-Plus Bonds Portfolio, which blends a solid foundation of investment-grade bonds with strategic allocations designed to capitalize on market inefficiencies. In this blog, we’ll explore the details of the Hemispheres Core-Plus Bonds Portfolio and answer some of the most frequently asked questions about fixed-income investing.
What Is the Hemispheres Core-Plus Bonds Portfolio?
The Hemispheres Core-Plus Bonds Portfolio is a bond investment strategy carefully designed to balance stability and the potential for higher returns. It consists of two primary components:
Core Component: This portion includes a highly diversified set of securities, like those found in the Bloomberg Aggregate Bond Index. As of July 2024, the Bloomberg Aggregate included 2,324 securities spread across U.S. Treasuries, Government Sponsored Entities (GSEs), Uniform Mortgage-Backed Securities (MBS), corporate bonds, and asset-backed securities (ABS). The core component typically holds:
| U.S. Treasury Bonds | 40-45% |
| Government Sponsored Entities (GSEs) | 5-10% |
| Uniform Mortgage-Backed Securities (MBS) | 25-30% |
| Corporate Bonds | 20-25% |
| Asset-Backed Securities (ABS) | 0.5-2% |
The Bloomberg Aggregate Bond Index credit rate distribution is as follows:
| Credit Quality Distribution | Weight (%) |
| Aaa | 1.4% |
| Aa | 72.58% |
| A | 11.55% |
| Baa | 12.18% |
| Not Rated | 2.29% |
The Plus Component: The “plus” portion consists of more opportunistic allocations, including a combination of investment-grade and below-investment-grade bonds, preferred securities, sovereign bonds, and convertible bonds. These investments provide flexibility to capture superior returns through discounted bonds or undervalued opportunities. The inclusion of lower-rated bonds does not significantly alter the overall credit quality of the portfolio but enhances the potential for capital appreciation and income generation.
By blending these two components, the Hemispheres Core-Plus Bonds Portfolio aims to deliver consistent income with the potential for growth, making it an attractive option for investors looking to balance risk and return.
Frequently Asked Questions About Fixed-Income Investing
What is fixed-income investing?
Fixed income investing refers to the practice of investing in securities that provide regular interest payments (income). Common fixed-income securities include bonds, treasury bills, and other debt instruments. Fixed-income investments are favored for their predictability and stability compared to equities, making them an essential part of diversified portfolios.
What types of fixed-income securities can I invest in?
The most common types include government bonds, corporate bonds, municipal bonds, and CDs. Each comes with varying levels of risk and tax implications.
How do bonds work?
When you invest in a bond, you essentially lend money to an entity (such as a corporation or government) in exchange for periodic interest payments and the return of the principal amount at the end of a specific term. The principal due date is known as the maturity date.
How often to Bonds pay interest?
Interest payments are most frequently made semi-annually but can be paid annually, quarterly and monthly as well.
How does inflation impact fixed-income investments?
Inflation erodes the real return on fixed-income investments, as the purchasing power of the interest payments declines.
How are interest rates and bond prices related?
When interest rates rise, bond prices tend to fall, and vice versa. This inverse relationship is crucial for understanding the risk involved in bond investments.
Why should I include bonds in my investment portfolio?
Bonds offer several benefits to a diversified investment portfolio, including:
- Income Generation: Bonds provide regular interest payments, which can be a stable source of income, particularly in retirement.
- Lower Volatility: Bonds are generally less volatile than stocks, making them a safer investment during market downturns.
- Diversification: Bonds have a low correlation with equities, which can help reduce overall portfolio risk. For instance, the correlation between investment-grade bonds and the S&P 500 is only 0.05. This means that when stock markets experience volatility, bonds can help protect your portfolio from large drawdowns.
In times of stock market down trends, bonds tend to outperform equities, helping safeguard the value of a portfolio.
What are the risks of investing in bonds?
While bonds are generally considered safer than stocks, they are not risk-free. Key risks associated with bond investing include:
- Interest Rate Risk: Bond prices and interest rates move inversely. When interest rates rise, bond prices typically fall, and vice versa. If you sell a bond before it matures in a rising rate environment, you may incur a loss. However, if you hold the bond until maturity, you will receive the full principal.
- Credit Risk (Default Risk): This is the risk that the bond issuer may default on its interest or principal payments. Corporate bonds, especially those rated below investment grade, carry higher credit risk. However, defaults are not common. As of June 2024, S&P Global expected the default rate for speculative-grade bonds to be around 4.5%.
- Inflation Risk: As stated above, inflation erodes the purchasing power of the interest payments you receive from bonds. While bonds provide fixed payments, rising inflation can reduce the real value of those payments over time.
- Liquidity Risk: Some bonds, particularly lower-rated or less commonly traded ones, may be difficult to sell quickly without a significant price discount.
- No FDIC Insurance: Unlike bank deposits, bonds are not insured by the Federal Deposit Insurance Corporation (FDIC). This means they carry some degree of risk depending on the issuer’s financial health.
- Investing in Fixed Income ETFs may include leverage: Leverage can increase returns in good times but amplify volatility and losses in tough times. Hemispheres Investment Management does not use leverage in its strategies.
How does the Core-Plus strategy differ from traditional bond portfolios?
The Core-Plus Bonds Portfolio stands out due to its strategic allocation of both core and plus bonds. Traditional bond portfolios often focus solely on investment-grade securities, which offer stability but limited potential for high returns. In contrast, the Core-Plus strategy enhances potential returns by including opportunistic investments in investment grade, high-yield corporate, sovereign, and convertible bonds.
The “core” component provides the stability typical of high-quality bonds, while the “plus” component seeks to capitalize on undervalued securities, higher yields, and emerging opportunities. This dynamic approach allows for better performance, especially in varying market conditions.
Why Choose the Hemispheres Core-Plus Bonds Portfolio?
The Hemispheres Core-Plus Bonds Portfolio offers several key benefits for investors:
Diversification: By including both core bonds and opportunistic plus bonds, the portfolio spreads risk across different sectors and bond types, providing a balanced investment approach. Hemispheres Investment Management is a global investment management firm. Our process begins with in-depth bottom-up analysis and our principles have a wealth of knowledge respecting international and emerging market investing.
Potential for Higher Returns: The plus component allows the portfolio to pursue superior returns by investing in discounted bonds that may appreciate as credit conditions improve and as the bond nears maturity. The portfolio’s performance from 2015 to 2023 highlights this, as it delivered an annualized return of 2.68%, compared to just 0.33% for the Bloomberg Investment Grade Bond Index.
Stability and Growth: The core bonds offer a stable income stream, while the plus bonds add the potential for growth. This combination makes the Core-Plus strategy suitable for a wide range of investment goals, including income generation, capital preservation, and long-term growth.
How the Core-Plus Bonds Strategy Aligns with Your Financial Goals
Whether your financial goals center on income generation, capital preservation, tax mitigation or growth, the Hemispheres Core-Plus Bonds Portfolio can be customized to meet your specific needs and risk tolerance. Its blend of high-quality bonds and strategic investments makes it a versatile and balanced option for investors at all stages of life, especially those seeking stability and growth in a low-risk, fixed-income framework.
Incorporating this portfolio into your overall investment strategy can enhance diversification, reduce volatility, and offer opportunities for higher returns over time.
Conclusion
A skilled and experienced investment manager plays a crucial role in global fixed income investing where fundamental analysis is central. An experienced advisor can assist you in navigating the geopolitical, regulatory, economic and market risks both inside of the U.S. and internationally. Furthermore, adding global securities, including emerging market bonds, can provide diversification benefits to a fixed income portfolio.
Hemispheres Investment Management’s team of seasoned professionals have a 35-year track record of successful fixed income and equities investment strategies, including deep proficiency investing in US, international developed and emerging markets. Hemispheres can assist you in diversifying and enhancing your fixed income portfolio through the addition of high yield bonds.
Please contact Hemispheres Investment Management for a free consultation. We provide guidance and strategies to assist you in optimizing your investment portfolio and helping you achieve your investment goals. Book a meeting.
