STRATEGIC PARTNER CONTENT
Rebuild Your Core:
Constructing a Bond Portfolio to
Prosper in a Changing Environment
Chief Investment Officer
Sierra Mutual Funds The Bloomberg Barclays U.S.
Aggregate Bond Index (The Agg)
is often referred to as a “broad
exposure to the bond market.”
That isn’t true. The reality is the
Agg actually represents a narrower
slice of the bond market than
many investors realize. Its subsets
are, and always have been, highly
correlated to each other and to U.S.
Treasuries, and it excludes important
opportunities in fixed income.
by Joseph Letts Fixed-income asset classes omitted
from the Agg include high-yield
corporates, preferred stocks, floating
rate loans, emerging markets
debt, convertible bonds and more.
Intermediate-term bond mutual
funds as well as other Agg-centric
fixed-income solutions are missing
out on opportunities to enhance their
risk and returns.
Research Analyst
Sierra Mutual Funds Agg Problems Today:
by Terri Spath,
CFA, CFP ®
Highest Risk in Three Decades,
Limited Bond Market Exposure
Historically, the Agg has been
associated with a less risky
allocation, relative to other asset
classes, and has served as a
baseline reference for the strength
of U.S. bonds. However, the
composition of the Agg has
changed dramatically over the
years, and the net effect is it
has become a far riskier yardstick.
31 The STAR | NOVEMBER 2018
The chart spans the past three
decades. It illustrates the yield of the
Agg, the blue line, declining from
roughly six percent in the early 1990s
to below 3 percent in recent years.
Although the yield of the Agg has risen
recently from its lows several years
ago, it is still far below its historic levels
and has been trending higher since
July 2016.
What many investors are not familiar
with, though, is that the duration of the
Agg has reached a 30-year high. On
the same chart on the next page, the
duration is charted by the gray line.
Solution: Rebuild Your Core
Interest rates are trending upwards,
and at the same time, the Agg is
saddled with its highest duration,
or interest rate risk, in at least three
decades. Simply abandoning bonds or
shortening duration are both mistakes.
The solution to the problem is to build
a bond portfolio that looks like no other
by considering high-yield, emerging
markets, floating rate, municipals,
global and preferred stocks – essentially
the other 50 percent of the fixed-
income universe excluded in the Agg.
The challenge remains when to get in
and when to get out? Three steps drive
decisions that have historically resulted
in better returns with less risk versus
the Agg.