Anchoring Your Portfolio with High Quality Bonds


All fixed income investments are not created equal from a risk perspective

Although the importance of a fixed income allocation in a diversified investment portfolio can easily be forgotten given the extended low yield environment over the last 10 years, an allocation to this asset class remains an important component to a diversified investment portfolio. But from a risk perspective all fixed income investments are not created equal. Take high yield bonds, for example. They often perform more like an equity asset class compared to traditional corporate and government bonds (see table). High quality bonds, on the other hand, typically exhibit desirable diversification benefits and attractive returns during periods of market duress.

Correlations vs. S&P 500

Correlation, in terms of investments, is a statistic that measures the degree to which two securities move in relation to each other: 1 is perfectly correlated and 0 implies no relationship at all.

As evident in the table, high quality fixed income strategies such as Madison High Quality Intermediate Government Corporate Bond have exhibited low and/or negative correlations compared to U.S. domestic equities. More surprisingly, however, is the extent to which fixed income credit securities, as well as some of Morningstar’s largest fixed income separately managed account categories, have typically been positively correlated to the U.S. stock market.

Correlations Madison Investments HQ Bond

The Madison Advantage

The data paints a compelling picture: the Madison High Quality Intermediate Government Corporate Bond portfolio has historically been a strong diversifier during periods of volatility and negative stock market returns, even in a low yield environment.

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Madison High Quality Fixed Income

Portfolios are managed using a top-down investment process which focuses on capital preservation through active management of all key fixed income risks with an emphasis on duration and yield-curve positioning. Maturities range from 0-12 years with durations ranging from 0-9 years. Portfolios include U.S. Treasury, U.S. Agency and U.S. Corporate issues which typically have a minimum of $500 million in float. Portfolios hold no structured products or high-yield bonds. The average portfolio quality is “AA” and generally consists of between 20-30 securities.

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”), which also includes the Madison Scottsdale office. MAM and MIA are registered as an investment adviser with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer, and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison's toll-free number is 800-767-0300. | Any performance data shown represents past performance. Past performance is no guarantee of future results. | Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate. | This website is intended to be for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”), which also includes the Madison Scottsdale office. Hansberger Growth Investors, L.P. or “HGI” is an affiliate of “Madison Investments.” MAM, MIA and HGI are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer, and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.
Any performance data shown represents past performance. Past performance is no guarantee of future results.
Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.
This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Madison Investments does not provide investment advice directly to investors. Opinions stated are informational only and should not be taken as investment recommendation or advice of any kind whatsoever (whether impartial or otherwise).
Bonds are subject to certain risks including interest-rate risk, credit risk and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. In a low-interest environment, there may be less opportunity for price appreciation.
Diversification does not assure a profit or protect against loss in a declining market.
Gross performance results do not reflect the deduction of investment advisory fees. Your returns will be reduced by advisory fees and other expenses that may be incurred in the management of your investment advisory account. Investment advisory fees are described in our disclosure brochure. The following representative example shows the effect an investment advisory fee, compounded over a period of years, could have on the total value of a client’s portfolio: Assuming on initial investment of $1 million, a hypothetical return of 5% per year and annual advisory fees of 0.50%, the client would pay the following amounts: $5,113 after one year; $16,038 after three years; $27,969 after five years and $62,823 after ten years, reducing the client’s hypothetical return by such amounts, respectively. Using this example, a client’s portfolio would equal (rounded to the nearest thousand) $1,045,000 rather than $1,050,000 after one year; $1,141,000rather than $1,157,00 after three years; $1,246,000 rather than $1,274,000 after five years; and $1,553,000 rather than $1,616,0000 after ten years. Risks Associated with Investing
Average credit quality of the composite is not the result of an assessment of the by a Nationally Recognized Statistical Rating Agency (“NRSRO”) or any other independent entity.
All investments involve risk including possible loss of principal, and there is no guarantee that investment objectives will be met. Separately managed account programs may not be suitable for all investors who must consider the investment objectives, risks and fees of each Strategy carefully before investing.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
1. S&P 500® INDEX: Widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large-cap segment of the market, with over 80% coverage of U.S. equities, it is also an ideal proxy for the total market.
2. ICE Bank of America Merrill Lynch U.S. High Yield Index tracks the performance of below investment grade, but not in default, U.S. dollar denominated corporate bonds publicly issued in the U.S. domestic market, and includes issues with a credit rating of below BBB, based on an average rating by Moody’s, S&P and Fitch.
3. The Bloomberg Barclays US Credit Index measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government related bond markets. It is composed of the US Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities.
Morningstar Category Returns represent the simple average performance of various Morningstar U.S. Fund Categories. In an effort to distinguish funds by what they own, as well as by their prospectus objectives and styles, Morningstar developed the Morningstar Categories, which identify funds based on their investment styles as measured by their underlying portfolio holdings (portfolio statistics and compositions over the past three years).
4. Morningstar US SA Intermediate Core-Plus Bond: Intermediate-term core-plus bond portfolios invest primarily in investment-grade U.S. fixed-income issues including government, corporate, and securitized debt, but generally have greater flexibility than core offerings to hold non-core sectors such as corporate high yield, bank loan, emerging-markets debt, and non-U.S. currency exposures. Their durations (a measure of interest-rate sensitivity) typically range between 75% and 125% of the three-year average of the effective duration of the Morningstar Core Bond Index.
5. Morningstar US SA Intermediate Core Bond: Intermediate-term core bond portfolios invest primarily in investment-grade U.S. fixed-income issues including government, corporate, and securitized debt, and hold less than 5% in below-investment-grade exposures. Their durations (a measure of interest-rate sensitivity) typically range between 75% and 125% of the three-year average of the effective duration of the Morningstar Core Bond Index.
6. Morningstar Short-Term Bond Category: Short-term bond portfolios invest primarily in corporate and other investment-grade U.S. fixed income issues and typically have durations of 1.0 to 3.5 years. Short-term is defined as 25% to 75% of the three-year average effective duration of the MCBI.