Should You Worry About Bond Funds If Interest Rates Are On The Rise?

Transcription

1 Should You Worry About Bond Funds If Interest Rates Are On The Rise? October 17, 2013 Matthew H. McPhail, CFA, Chief Investment Officer Sentinel Benefits & Financial Group 55 Walkers Brook Drive, Suite 100 Reading, MA WEB Date of first use:

2 Disclosure Investment advisory services provided by Sentinel Pension Advisors, Inc. (SPA), an SEC-registered investment adviser. Securities offered through Sentinel Securities, Inc. (SSI) Member FINRA & SIPC. SPA and SSI are affiliated companies. Sentinel Benefits & Financial Group is the brand name for the Sentinel family of companies, which includes SPA and SSI. SSI, SPA, Fidelity Asset Management and J.P. Morgan Asset Management are not affiliated companies. Mr. McPhail is an Investment Adviser Representative of SPA.

3 Webinar Outline History of Interest Rates: Then and Now Bond Category Average Returns: Past vs Select Bond Fund Returns: Past vs Our Expectations for Interest Rates Going Forward Flexible Bond Strategies Plan Sponsor Considerations Q&A

4 Long Term Interest Rates Source: Yahoo Finance Past Performance is not indicative of future results

5 Interest Rates Recently Source: Yahoo Finance Past Performance is not indicative of future results

6 Total Returns as of 12/31/12 Bond Fund Category Returns Through 2012 Morningstar Fund Category 1 Year 3 Year 5 Year Short-Term Bond 3.67% 3.21% 3.30% Intermediate-Term Bond 7.01% 6.96% 6.07% Long-Term Bond 12.97% 11.84% 8.75% Short Government 1.06% 2.11% 2.86% Long Government 3.87% 15.38% 10.26% Bank Loan 9.43% 6.82% 3.79% High Yield Bond 14.67% 10.49% 8.02% Index Barclays Aggregate Bond 4.21% 6.19% 5.94% Source: Morningstar Past Performance is not indicative of future results

7 Select Bond Fund Returns Through 2012 Total Returns as of 12/31/12 Fund Ticker 1 Year 3 Year 5 Year PIMCO Total Return PTRAX 10.08% 7.48% 8.07% MetWest Total Return MWTRX 11.39% 9.33% 8.56% Prudential Total Return PDBZX 9.82% 9.17% 8.59% JP Morgan Core Bond WOBDX 5.08% 6.54% 6.63% Vanguard Short-Term Bond Index VBISX 1.95% 2.94% 3.70% Fidelity Spartan US Bond Index FBIDX 4.06% 6.00% 5.64% Index Barclays Aggregate Bond 4.21% 6.19% 5.94% Source: Morningstar Past Performance is not indicative of future results

8 Bond Fund Assets Have Surged As Yields Fell

9 Bond Fund Category Returns in Total Returns as of 9/30/13 Morningstar Fund Category YTD 3 Month 1 Year Q Short-Term Bond 0.00% 0.57% 0.38% -0.91% Intermediate-Term Bond -1.70% 0.31% -0.96% -2.61% Long-Term Bond -3.64% -0.62% -2.02% -3.70% Short Government -0.87% 0.10% -0.98% -1.00% Long Government % -2.35% % -6.24% Bank Loan 3.77% 1.24% 5.39% 0.19% High Yield Bond 3.62% 2.20% 6.75% -1.36% Index Barclays Aggregate Bond -1.89% 0.57% -1.68% -2.32% Source: Morningstar Past Performance is not indicative of future results

10 Select Bond Fund Returns in Total Returns as of 9/30/13 Fund Ticker YTD 3 Month 1 Year Q PIMCO Total Return PTRAX -2.11% 1.86% -1.11% -3.66% MetWest Total Return MWTRX 0.32% 1.16% 1.15% -2.34% Prudential Total Return PDBZX -1.70% 1.19% -0.10% -3.29% JP Morgan Core Bond WOBDX -1.69% 0.33% -1.38% -2.13% Vanguard Short-Term Bond Index VBISX -0.04% 0.55% 0.08% -0.91% Fidelity Spartan US Bond Index FBIDX -2.20% 1.17% -2.12% -2.32% Index Barclays Aggregate Bond -1.89% 0.57% -1.68% -2.32% Source: Morningstar Past Performance is not indicative of future results

11 Sentinel Pension Advisors Interest Rate Expectations 3 Scenarios 1. Base Case The bottom in rates has been seen. Rates stay in a low range with an gradual upward bias. 2. Less Likely Rates move to the up side in accelerated fashion in to much higher levels. 3. Least Likely Rates fall to new lows.

12 Moving Forward How to Manage Fixed Income Assets in a Rising Rate Environment 1. Investors must be willing to change. What has worked well in the past might not in the future. 2. Embrace flexible strategies. Look for true diversification across all fixed-income asset classes. 3. Diversify away from strategies primarily exposed to interest rate movements. 4. Lower your return expectations.

13 Falling Interest Rates Have Been a Tailwind to Bond Returns for 30 Years. What if the Trend is Reversing? Source: Barclays Capital & Goldman Sachs Past Performance is not indicative of future results

14 Plan Sponsors Should Consider Providing Plan Participants With Access to Flexible Bond Strategies Key Characteristics: Typically best characterized as an unconstrained strategy. These managers have the freedom to: 1. Invest across the various bond market asset classes without restraint. 2. Tactically adjust the portfolio duration or exposure to interest rate movements. 3. Take an absolute return approach to investing as opposed to a benchmark centric approach. A track record of solid returns that also demonstrates the ability to preserve capital during rising interest rate periods. Sentinel Pension Advisors has identified several fund strategies that we believe would be excellent compliments to your existing fund holdings.

15 Final Thoughts 1. In our opinion, interest rates have likely bottomed. A gradually rising rate environment going forward is our most probable scenario. Expect volatility. 2. Without the tailwind of falling rates, total returns from bond funds going forward are unlikely to match past returns. 3. Many bond funds are negative through Q as interest rates spiked during the summer. 4. Plan Sponsors should consider adding exposure to flexible income strategies that are better positioned to survive a rising interest rate environment. 5. All bond investors should lower their expectations for total returns based on the historically low current level of interest rates.

16 Q&A

17 Disclosures The views and opinions expressed in this webinar are those of Sentinel Pension Advisors and are subject to change based on market and other conditions. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The information provided in this webinar is for informational purposes only and is not intended, nor should it be interpreted, as an offer, solicitation or recommendation to purchase or sell any security mentioned. This webinar contains certain statements that may be deemed as forward-looking statements. These statements are based on certain assumptions and analyses made by Sentinel Pension Advisors in light of its perception of historical trends, current conditions, expected future developments and other factors it believes appropriate under the circumstances. Past performance is not a guarantee of future results. Consider the investment objectives, risks, and charges and expenses of the investment company carefully before investing. The prospectus and, if available, the summary prospectus contain this and other information about the investment company. A prospectus can be obtained by contacting your investment professional. The prospectus should be read carefully before investing. Diversification may not protect against market risk.

18 Disclosures Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices. The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein. The exclusion of failed or closed hedge funds may mean that each index overstates the performance of hedge funds generally. The Barclays US Aggregate Bond Index represents an unmanaged diversified portfolio of fixed-income securities, including U.S. Treasuries, investment-grade corporate bonds, and mortgage-backed and assetbacked securities. The Index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index. Morningstar Category Averages represent the average return for all funds within a specific category. Morningstar information has been obtained from sources that we believe to be reliable, however, we do not guarantee the accuracy of such information.