This week's update is diving a little more into detail in what is happening in Round portfolios.
In Round portfolios there is reduced exposure to high yield bonds and increased exposure to municipal bonds.
There appears to be limited reward relative to the risks associated with holding high yield bonds.
A high yield bond is a corporate loan that theoretically should pay its investors a high level of income because there is a great risk that the company may not be able to pay back the loan.
The expected return of high yield bonds compared to less risky government bonds is near post crisis lows, meaning the compensation is very limited for the incremental repayment risk associated with the loan.
Some of the most prominent bond fund managers are saying that you should go up in credit quality and reduce credit risk.
An example of this is by selling a high yield corporate bond and buying a less risky municipal bond.
Hope you found this interesting and see you next week!
Disclosure: The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Forecasts or projections of investment outcomes in investment plans are estimates only, based upon numerous assumptions about future capital markets returns and economic factors. As estimates, they are imprecise and hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.
The theoretical definition of a high yield bond is paraphrased and extrapolated upon Investopedia’s article, “High-Yield Bond” for a non-Layman’s introduction to the concept. The expected return of high yield bonds relative to government bonds being near post crisis lows was in reference to the Bloomberg Barclays US Corporate High Yield Average OAS with a Bloomberg terminal ticker LF98OAS Index for the date range of 4/21/2008 – 4/18/2019. Some of the most prominent bond fund managers saying to go up in credit quality and reduce credit risk was in reference to the Barron’s article, “Corporate Credit Could Be the Next Bubble to Burst” by Randall W. Forsyth and in reference to the Bloomberg 4/17/2019 video interview with Guggenheim Partners’ Scott Minerd titled, “Guggenheim’s Minerd Says Fed Rate Pause Pushes Recession Back to Maybe 2021”. The example provided of moving up in credit quality and reducing credit risk assumes that the high yield bond has a lower credit rating than an investment grade municipal bond.