Is Now the Time for Short-Term Bonds?
Pacific Asset Management, November 2017
The fixed-income market continues to be plagued by themes such as interest-rate volatility and low levels of global yields. How can investors maneuver around the risks inherent in these themes? Pacific FundsSM Short Duration Income is designed to seek current income with protection against sudden or large interest-rate changes.
Dominic Nolan: Many investors are revisiting their fixed-income allocation in light of low yield levels and rising short-term interest rates. We believe short-term corporate bond investments, as part of an overall diversified portfolio, may be an option for those either worried about rising interest rates or seeking a higher level of income compared to other short-term investments.
Historically, when compared to longer-term bonds, short-term corporate bonds have been a more effective defense against rising interest rates because their prices are less sensitive to large interest-rate movements.
Over the past 40 years (see chart at 00:38), short-term corporate bonds have provided more than 90% of the returns of intermediate-term bond with about half of the volatility.
David Weismiller: Additionally, investors can diversify risk, shifting from interest-rate risk inherent in U.S. government bonds towards credit-risk with short-term corporate bonds. Historical data indicates that investors were generally compensated for the increased risk.
As you can see (see chart at 01:02), short-term corporate bonds have historically outperformed short-term government bonds. In fact, short-term corporate bonds consistently outperformed over rolling one, three and five-year periods since 1976.
While many short-term bond funds are anchored in government securities as core investments, our focus is on corporate securities. We carefully select securities across multiple fixed-income sectors, to reflect our views on market segments and the broader interest-rate environment. We believe this approach can provide more income with less sensitivity to interest-rate movements.
Dominic Nolan: As you can see (see chart at 01:39) , Pacific Funds Short Duration Income has historically outperformed the Morningstar Category™ average return. In fact, the Fund consistently outperformed over rolling one- year and three-year periods since inception.
Short-term, intermediate-term, and long-term bonds typically have maturities of less than three years, three to ten years, and greater than ten years, respectively.
Past performance does not guarantee future results. For performance data current to the most recent month-end, call Pacific Funds at (800) 722-2333, option 2, or go to www.PacificFunds.com/Performance.
About Risk: All investing involves risks including the possible loss of the principal amount invested. Debt securities with longer durations or fixed interest rates tend to be more sensitive to changes in interest rates, making them generally more volatile than debt securities with shorter durations or floating or adjustable interest rates. The Fund is subject to liquidity risk (the risk that an investment may be difficult to purchase and sell within a reasonable amount of time at approximately the price the fund has valued the investment) and credit risk (the risk an issuer may be unable or unwilling to meet its financial obligations, risking default). Floating-rate loans (usually rated below investment grade) and high-yield/high-risk bonds (“junk bonds”) have greater risk of default than higher-rated securities/higher-quality bonds that may have a lower yield. Interest rates and bond prices have an inverse relationship. The fund is also subject to foreign markets risk.
Pacific Life Fund Advisors LLC (PLFA), a wholly owned subsidiary of Pacific Life Insurance Company, is the investment adviser to the Pacific Funds. PLFA also does business under the name Pacific Asset Management and manages certain funds under that name.
Pacific Life Insurance Company is the administrator for Pacific Funds. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.
You should consider a fund’s investment goal, risks, charges and expenses carefully before investing. The prospectus and/or the applicable summary prospectus contain this and other information about the fund and are available from your financial advisor or www.PacificFunds.com. The prospectus and/or summary prospectus should be read carefully before investing.
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Mutual funds are offered by Pacific Funds. Pacific Funds are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA), and are available through licensed third parties. Pacific Funds refers to Pacific Funds Series Trust.
No bank guarantee. Not a deposit. May lose value. Not FDIC/NCUA insured. Not insured by any federal government agency.