Market Perspectives - April 2018

1. Market Perspective – April 2018
Experience Insight Impact
Overview: Most investment firms will guide investors toward a certain mix of equity exposure
with the rest falling into a so-called “safe basket” comprised largely of fixed income (or perhaps
alternative investments). The design of this basket is to earn some level of return, but above all
else, protect principle and reduce correlations in the portfolio. The goal is to improve overall
return, while reducing risk levels. While the exact mix of an asset allocation will depend largely
on an investor’s “risk” profile, as well as their goals and objectives, the dramatic rise in interest
rates has created a difficult environment for many investors. This month, we examine the current
fixed income landscape, as well as some potential solutions to this problem.
1

2. Year To Date Fixed Income Returns Have Proven Challenging
Experience Insight Impact
Through April 20th, YTD returns for most sub-asset classes in the fixed income area have been
negative (e.g. iShares Core US Aggregate Bond ETF, AGG = -2.39%; Barclays High Yield Bond ETF,
JNK = -.69%). Maintaining a diversified mix of fixed income strategies, with tactical tilting away
from long duration securities, has proven beneficial.
2
Source: Bloomberg, Goldman Sachs Asset Management
US Fixed Income Maturity and Quality Returns

3. 10 Year Treasury Yield Has Risen Rapidly
Experience Insight Impact
The chart above shows the 10 year Treasury yield which currently stands at 2.97% (as of 4/23/18) up from
a low of 2.04% (9/7/17). As yields rise, prices fall, leaving investors with “pain” in their “safe” buckets.
3
Source: Bloomberg

4. Fed Actions Heighten Interest Rate Risk
Experience Insight Impact
The chart to the right shows the
acceleration of the Fed balance
sheet tightening over the last year.
If this continues, which is expected
based on current Fed governor
statements, we may see interest
rates rise further, as well as fixed
income securities with higher
interest rate correlations (and
greater durations) fall.
4
After many years of accommodating
monetary policy from the Federal
Reserve (“Fed”), as denoted by the long
flat balance sheet in the chart on the
left, the unwind of Zero Interest Rate
Policy (“ZIRP”) has begun.
Source: Bloomberg

5. Solutions
Experience Insight Impact 5
• Maintaining a well diversified portfolio focused on correlation between asset classes, especially forward
looking ones, can add to portfolio optimization over time. It is not surprising that fixed income securities
have experienced difficulty after a lengthy bull market in bonds.
Source: Bloomberg, Goldman Sachs Asset Management
• In addition to diversification, limiting exposure to
interest rates, still appears logical. The included chart
shows that not all fixed income securities were equally
impacted by the interest rate moves.
• Alternative assets, in the form of market neutral,
long/short equity and various other strategies, offer
an opportunity for investors to have differentiated
return streams, while maintaining low correlations to
stocks and bonds. In the current environment, even
managed cash-like vehicles can offer some level of
return without adding large degrees of risk.
• Specific portfolio construction, with appropriate risk
levels, can be tailored to an individual investor’s goals
and objectives.

6. Market Perspective – April 2018
Experience Insight Impact
Conclusion: While fixed income has served many investors well over the long-term, a strong focus
on risk/reward seems prudent in this asset class, with rates seemingly set to continue their rise
over time. A well diversified mix of fixed income, with tactical tilts toward lower durations,
coupled with a mix of alternative assets, can help ensure this basket maintains the desired low
correlation. Overall, our focus remains on a flexible investment approach targeted towards
meeting our investor’s unique goals and objectives.
6

7. Disclaimer
Experience Insight Impact
Opinions expressed in this commentary may change as conditions warrant and is for informational
purposes only. Information contained herein is not intended to be personal investment advice for
any specific person for any particular purpose. We utilize information sources that we believe to
be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee
of future performance; investing involves risk and may result in loss of capital. Consider seeking
advice from a professional before implementing any investing strategy.
7