Presentation on theme: "Time to Invest in Short-Term Bonds? First Quarter 2010."— Presentation transcript:
Time to Invest in Short-Term Bonds? First Quarter 2010
2 Disclosures Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value of an investment will fluctuate thus an investors shares, when redeemed, may be worth more or less than their original cost. Mutual fund investing involves risk, including possible loss of principal. Bonds offer a relatively stable level of income, although bond prices will fluctuate providing the potential for principal gain or loss. Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return. U.S. Government guarantees apply only to the underlying securities of a portfolio and not a Funds shares. Mortgage-backed investments involve risk of loss due to prepayments and, like any bond, due to default. Because of the sensitivity of mortgage-related securities to changes in interest rates, a portfolios performance may be more volatile than if it did not hold these securities This paper reflects the analysis and opinions of RidgeWorth Investments as of March 2010. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. The analysis and opinions may not be relied upon as investment advice. Statements of fact are from sources considered reliable but no representation or warranty is made as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy. In preparing this paper, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from reliable sources. An investor should consider the funds investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information about the RidgeWorth Funds can be found in the funds prospectus. To obtain a prospectus, please call 1-888-784-3863 or visit www.ridgeworth.com. Please read the prospectus carefully before investing. ® 2010 RidgeWorth Funds. RidgeWorth Funds are distributed by RidgeWorth Distributors LLC. RidgeWorth Investments is the trade name for RidgeWorth Capital Management, Inc., the adviser to the RidgeWorth Funds, and is not affiliated with the distributor.
4 Moving out the yield curve has allowed investors to capture more income Since 1954, the historical shape of the yield curve indicates that longer term bonds have higher yields. This risk premium is due to the fact that the price of a bond in changing interest rate environments is directly related to its duration. Solid Long-Term Performance Source: Federal Reserve and Bloomberg 12/31/09 Past performance does not guarantee future results.
5 However, short-term bonds have captured the lions share of long-term bond returns Short-term bonds captured 75% or more of the returns of long-term bonds over most time periods. Over the 3- and 5-year periods, short-term bonds captured nearly 90% of the returns of long- term bonds. Solid Long-Term Performance Source: Barclays Capital and FactSet 12/31/09 Past performance does not guarantee future results.
6 Over the last 30 years, short-term bonds had a higher Sharpe Ratio than long-term bonds. In the most recent periods, the Sharpe Ratio for the 1-3 year strategy was more than double the longer term bond. The higher the Sharpe Ratio, the better the bonds historical risk-adjusted performance. The Sharpe Ratio for short-term bonds far exceeded that of long-term bonds Attractive Risk/Reward Trade-Off Source: Barclays Capital and FactSet 12/31/09 Past performance does not guarantee future results.
7 Between 1976 and 2009, short-term bonds had an average annualized total return of 7.4%, with a high of more than 23.0% and a low of only -0.2%. In contrast, long-term bonds had an average total return of 8.3% with its best 12-month period generating 33.5% and its worst 12-month period generating -8.6%. Short-term bonds have had less downside risk relative to longer term bonds Attractive Risk/Reward Trade-Off *T-bill returns start in 1978 Source: Barclays Capital; Merrill Lynch/Bank of America and Bloomberg 12/31/09 Past performance does not guarantee future results.
8 Investors should be aware that short-term bond returns fluctuate with the market. The 1-3 year strategy outperformed 3-month T-bills 69% of rolling 12-month period. However, during that 30-year period, short-term bonds also experienced periods of underperformance. Despite an attractive risk/reward profile, short-term bonds do fluctuate in value Attractive Risk/Reward Trade-Off Comparison of rolling 12-month return of Barclays Capital 1-3 U.S. Aggregate Government Credit Index minus Merrill Lynch/Bank of America 3-Month T-bill Index. Source: Barclays Capital, Merrill Lynch/Bank of America, Bloomberg and FactSet 12/31/09 Past performance does not guarantee future results.
9 Many uncertainties regarding the timing and magnitude of interest rate changes exist. If rates stay low, short-term bonds may be for those who have excess cash reserves. If rates rise, they may be attractive for investors who have the majority of their fixed-income allocation in longer-term bonds. Short-term bonds may be attractive for investors at either end of the yield curve Compelling Investment Opportunity Shaded areas represent recession periods Source: FactSet 12/31/09 Past performance does not guarantee future results.
10 The SEC is in the process of updating money market mutual fund regulation. The reform is expected to curtail the yield on money market funds while providing greater liquidity and a higher degree of safety. These changes are viewed as positive for investors who need the security and liquidity of money market funds. Investors with an investment horizon beyond one-year should seek alternative strategies to enhance yield. To enhance yield investors should extend maturities beyond the money market arena to the low duration/short-term fixed-income markets, albeit with more risk. Past performance does not guarantee future results. Regulatory reform is likely to impact demand for short-term bonds Low Volatility Option Given Reform
11 Consider an allocation to short-term bonds as part of a diversified fixed income portfolio Conclusion Less downside risk relative to longer term bonds Solid long-term performance 1 Attractive risk/reward trade-off Compelling investment opportunity created by the current market The current market environment has created an opportune time to invest in short-term bonds. Investors with excess cash reserves earning near zero percent, as well as those invested in long-term bonds who may be most impacted by a rise in rates, will be well served to consider an allocation to short-term bonds as we believe they offer : Incremental yield for investors with excess cash 1 Past performance does not guarantee future results.
12 Index Definitions & Investment Terms Glossary Standard & Poors 500 Index is an unmanaged index of 500 selected common large capitalization stocks (most of which are listed on the New York Stock Exchange) that is often used as a measure of the U.S. stock market. Merrill Lynch/Bank of America 3-Month U.S. Treasury Bill Index tracks the total return performance of a 3-month Treasury bill, based on monthly average auction rates. Barclays Capital 1-3 year Government/Credit Index is a component of the U.S. Government/Credit Index that includes Treasuries, Government-Related issues, and Corporates maturing between one and three years. Barclays 1-5 year Government/Credit Index is a component of the U.S. Government/Credit Index that includes Treasuries, Government-Related issues, and Corporates maturing between one and five years. Barclays Intermediate Government/Credit Index is an unmanaged index composed of all bonds that are investment grade rated Baa or higher by Moodys or BBB or higher by S&P, if unrated by Moodys. Issues must have at least one year to maturity. Barclays U.S. Aggregate Index is a widely recognized index of securities that are SEC-registered, taxable, and dollar denominated. The Index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. Barclays U.S. Government/Credit Index is a widely recognized composite made up of the Barclays U.S. Government Index and the Barclays U.S. Credit Index, which include U.S. government, Treasury and agency securities, as well as high grade corporate bonds. Sharpe Ratio is a risk-adjusted measure that is calculated using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe Ratio, the better the funds historical risk-adjusted performance