Fixed-income opportunities for the current market A potential measure of protection from rising rates and inflation

Transcription

1 Taxable Fixed-Income Fixed-income opportunities for the current market A potential measure of protection from rising rates and inflation Interest rates have been at historic lows for some time and are now beginning to climb. Inflation may also be on the rise. While intermediate-term have been the best-selling mutual fund category for the last three years, other fixed-income options may be more compelling in the current market environment. Last 50+ years of interest rates (4/54 12/12) 16% Time period 7/54 4/70 Time period 11/93 10/94 10-year Treasury yield (%) 12% 8% 4% 0% Rise in interest rates 5.01% Bond cumulative principal return 20.32% Time period 12/76 9/81 Rise in interest rates 8.03% Bond cumulative principal return 28.89% Rise in interest rates 2.41% Bond cumulative principal return 11.18% 1950s 1960s 1970s 1980s 1990s 2000s 2010s Bond cumulative principal returns by decade 12.06% 10.46% 3.71% 12.67% 6.99% 30.62% 1950s 1960s 1970s 1980s 1990s 2000s Source: Morningstar, Inc. as of 12/31/12. Performance is historical and does not guarantee future results. See last page for asset class representation and index definitions. Performance includes reinvestment of all distributions. It is not possible to invest directly in a category or an Index. Performance over other time periods might not be as favorable.

2 A compelling option for a rising-rate environment Consider other fixed-income options to combat rising rates Historically, several fixed-income asset classes, including floating-rate loans, high-yield and ultra-short, offered a measure of protection from higher interest rates, making them a strong core for a portfolio. Ultra-short, floating-rate loans and high-yield outperformed when interest rates have risen by 1% or more (annualized total returns, 2/92 6/13) 11.70% 8.34% 2.43% 2.38% 2.00% 1.49% 1.11% 4.13% Floatingrate loans Highyield Ultrashort-term Shortterm Highyield muni Shortterm muni Intermediateterm Longterm Source: Morningstar as of 6/30/13. Past performance is historical and does not guarantee future results. Asset class representation: floating-rate notes, Credit Suisse Leveraged Loan Index; high-yield, Credit Suisse High-Yield Index; ultrashort-term, Ibbotson SBBI 1-Year Treasury Constant Maturity Index; short-term, Barclays Aggregate 1-3 Year Index; high-yield muni, Morningstar High-Yield Muni category; short-term muni, Morningstar Short-Term Muni category; intermediate-term, Barclays Aggregate 7-10 Year Index; long-term ; Barclays Aggregate 10+ Year Index. This data is for illustrative purposes and does not represent any Deutsche Asset & Wealth Management product. Index and category returns do not reflect fees or expenses. It is not possible to invest directly in an index or category. Performance for other time periods may not be as favorable. See last page for index and category definitions. Compared to other fixed-income asset classes, floating-rate loans are typically less vulnerable to and are more sensitive to credit and default risks. Floating-rate loans are debt instruments with a variable rate that generally resets every 30 to 90 days. Because of their shorter maturities, short-term are typically less vulnerable to rising interest rates than longer-term. Short-term offer a shorter length of time (about one to three years) until principal must be repaid. Short-term typically have the least fluctuation of principal, followed by floating-rate loans and finally by intermediate-term and long-term, which typically have the most. Corporate are subject to taxation; municipal are generally free from federal income tax. Fixed-income opportunities for the current market 2

3 Multi-sector components offered a potential measure of protection from rising inflation Ultra-short, floating-rate loans and high-yield typically performed well when inflation rose Traditionally, only a few asset classes have held up in an inflationary environment. Over the past 10 years, each component of our multi-sector approach floating-rate loans (bank loans), ultra-short and high-yield have had some of the highest correlations to inflation, according to Morningstar as of 6/30/13. This means that as inflation moved higher, so have the returns of these asset classes. A measure of protection from higher inflation (10-year correlation as of 6/30/13) Inflation Bank loan Ultrashort bond Commodities High yield muni Natural resources High-yield bond Inflation protected (TIPs) Intermediate-term bond 0.06 Short government 0.17 Long-term bond 0.18 Intermediate government 0.20 Long government Top 5 Bottom Source: Morningstar as of 6/30/13. Performance is historical and does not guarantee future results. Data is for illustrative purposes and does not represent any Deutsche Asset & Wealth Management product. Correlation is a measure of how closely two variables move together over time. A 1.0 equals perfect correlation, where variables more in the same direction. A -1.0 equals total negative correlation, where variables move in opposite directions. All asset classes are represented by Morningstar categories, except inflation, which is represented by the Morningstar/Ibbotson SBBI U.S. Inflation Index (tracks U.S. inflation); and commodities, which are represented by the Dow Jones UBS Commodities Index (see last page for definition). Morningstar Bank Loan portfolios primarily invest in floating-rate bank loans instead of. Morningstar High-Yield Bond portfolios concentrate on lower-quality, which are riskier than those of higher-quality companies. Morningstar High Yield Muni portfolios invest at least 50% of assets in high-income municipal securities that are not rated or that are rated by a major agency at the level of BBB and below. Morningstar Inflation Protected Bond portfolios invest primarily in debt securities that adjust their principal values in line with the rate of inflation. Morningstar Intermediate-Term Bond portfolios invest primarily in corporate and other investment-grade U.S. fixed-income issues and typically have durations of 3.5 to 6.0 years. Morningstar Intermediate Government portfolios have at least 90% in backed by the U.S. government or by government agencies and have durations of 3.5 to 6.0 years. Morningstar Long Bond portfolios invest primarily in corporate and other investment-grade U.S. fixed-income issues and typically have durations of more than 6.0 years. Morningstar Long Government portfolios have at least 90% in backed by the U.S. government or by government agencies and have durations of more than 6.0 years. Morningstar Natural-Resources portfolios focus on commodity-based industries such as energy, chemicals, minerals, and forest products in the United States or outside of the United States. Morningstar Short Government portfolios have at least 90% in backed by the U.S. government or by government agencies and have durations between 1.0 to 3.5 years. Morningstar Ultrashort Bond portfolios invest primarily in investment-grade U.S. fixed-income issues and have durations typically of less than one year. Index and category returns assume reinvestment of all distributions. Index returns do not reflect fees or expenses and it is not possible to invest directly in an index. Fixed-income opportunities for the current market 3

4 A global team working across platforms to bring the best ideas together Ty Anderson Managing director Portfolio manager: Floating Rate Specialty: Floating-rate loans Experience: 31 years Eric S. Meyer Managing director, CFA Portfolio manager: Floating Rate Specialty: Corporate loans Experience: 32 years Bill Chepolis Managing director, CFA Portfolio manager: GNMA and Ultra-Short Duration Specialty: Mortgage-backed securities Experience: 29 years Gary Russell Managing director, CFA Portfolio manager: Ultra-Short Duration Specialty: High-yield corporates Experience: 20 years Darwei Kung Vice president, CFA Portfolio manager: Ultra-Short Duration Specialty: Quantitative strategies Experience: Five years John Ryan Director Portfolio manager: Ultra-Short Duration Specialty: Investment-grade corporate and emergingmarket debt Experience: 19 years Fixed-income opportunities for the current market 4

5 Three fixed income options for a potential measure of customized protection from higher interest rates and inflation A potential measure of protection DWS GNMA Fund (GGGGX) GNMA (Government National Mortgage Association), which are backed by the full faith and credit of the U.S. government, have provided solid downside protection during the last three recessions and have delivered consistent positive returns in 35 of the last 36 calendar years ( ) regardless of the direction of interest rates. The fund seeks to provide consistently strong, risk-adjusted performance by investing in mortgage-backed investments using a value orientation and rigorous prepayment analysis. The team seeks to avoid negative surprises by building a diversified and risk-appropriate portfolio. (Diversification neither assures a profit nor guarantees against a loss.) A potential measure of protection and a level of enhancement DWS Ultra-Short Duration Fund (SDUAX) A multi-sector approach combines ultra-short, which may provide a potential measure of protection in a rising rate environment, with floating rate loans and high-yield, which offer a level of enhancement when rates and inflation rise. By maintaining an average portfolio duration of one year or less, an investment can potentially minimize the impact of interest-rate moves on a fixedincome portfolio. During normal market conditions, the fund s investment team seeks to limit duration risk by maintaining an average portfolio duration of one year or less. 2 A potential level of enhancement DWS Floating Rate Fund (DFRAX) Floating-rate loans offer a potential level of enhancement, providing strong returns when rates rose one percentage point or more in 12-month periods and the highest correlation to inflation of any Morningstar category. (See page 2 for return data and page 3 for correlation figures.) The portfolio managers focus on loans they believe, with a high degree of conviction, will be repaid at face value The fund offers diversified and balanced portfolio weightings designed to avoid negative surprises and minimize defaults that may lead to excess volatility and downside risks. Effective duration: 6.13 years 1 Effective duration: 0.80 years Effective duration: 40-day reset Maximum non-investment-grade exposure: 10% Maximum non-investment-grade exposure: 50% Maximum non-investment-grade exposure: 100% Source: Morningstar, Inc. as of 6/30/13. Performance is historical and does not guarantee future results. See last page for asset class representation and index definitions. Performance includes reinvestment of all distributions. It is not possible to invest directly in a category or an index. Performance over other time periods might not be as favorable. 1 Effective duration is an approximate measure of the fund s sensitivity to interest-rate changes taking into consideration any maturity shortening features. 2 Duration, which is expressed in years, measures the sensitivity of the price of a bond or bond fund to a change in interest rates. Fixed-income opportunities for the current market 5

6 Asset class representation On page 1, are represented by the Barclays U.S. Aggregate Index. On page 5, asset classes are represented as follows: floatingrate loan returns, Credit Suisse Leveraged Loan Index; floating-rate loan correlation, Morningstar Bank Loan category; GNMA, Barclays GNMA Index; high-yield, Credit Suisse High Yield Index, ultra-short ; Barclays 1-Year Duration Index; intermediateterm, Barclays 5-7 Year U.S. Aggregate Index. Index definitions Barclays 1-3 Year U.S. Aggregate Index tracks the performance of domestic, taxable investment-grade with average maturities of one to three years. Barclays 5-7 Year U.S. Aggregate Index tracks the performance of domestic, taxable investment-grade with average maturities of five to seven years. Barclays 7-10 Year U.S. Aggregate Index tracks the performance of domestic, taxable investment-grade with average maturities of seven to 10 years. Barclays 10+ Year U.S. Aggregate Index tracks the performance of domestic, taxable investment-grade with average maturities of more than 10 years. Barclays U.S. Aggregate Index tracks the performance of the broad U.S. investment-grade, fixed-rate bond market, including both government and corporate. Credit Suisse High Yield Index reflects a trader-priced portfolio constructed to mirror the global high-yield debt market. Credit Suisse Leveraged Loan Index tracks the balance and current spread over LIBOR for fully funded term loans. Dow Jones/UBS Commodity Index tracks a diversified group of commodities and commodities futures contacts traded on both U.S. and London exchanges. Morningstar/Ibbotson SBBI U.S. 1-Year Treasury Constant Maturity Yield Index is a custom index set to measure the performance of U.S. Treasuries with maturities of one year. Morningstar/ Ibbotson SBBI U.S. Long-Term Government Index tracks the performance of a one-bond portfolio with a maturity near 20 years. Morningstar High Yield Muni portfolios invest at least 50% of assets in high-income municipal securities that are not rated or that are rated by a major agency at the level of BBB and below. Morningstar Muni Short portfolios invest in issued by state and local governments and have durations of less than 4.5 years. Index returns do not reflect expenses or fees, and it is not possible to invest directly in an index or category. Important risk information Bond and loan investments are subject to interest-rate and credit risks. When interest rates rise, bond prices generally fall. Credit risk refers to the ability of an issuer to make timely payments of principal and interest. Investments in lower-quality ( junk bond ) and non-rated securities present greater risk of loss than investments in higher-quality securities. Floating-rate loans tend to be rated below investment grade. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. In certain situations, it may be difficult or impossible to sell an investment at an acceptable price. The funds may lend securities to approved institutions. Investing in foreign securities, particularly those of emerging markets, presents certain risks, such as currency fluctuations, political and economic changes, and market risks. In the current market environment, mortgage-backed securities are experiencing increased volatility. DWS Floating Rate Fund is non-diversified and can take larger positions in fewer issues, increasing its potential risk. See the prospectus for details. Obtain a prospectus To obtain a summary prospectus, if available, or prospectus, download one from dws-investments.com, talk to your financial representative or call (800) We advise you to carefully consider the product s objectives, risks, charges and expenses before investing. The summary prospectus and prospectus contain this and other important information about the investment product. Please read the prospectus carefully before you invest. All investments involve risk, including potential loss of principal. Investment products: No bank guarantee Not FDIC insured May lose value Investment products offered through DWS Investments Distributors, Inc. Advisory services offered through Deutsche Investment Management Americas, Inc. Deutsche Asset & Wealth Management represents the asset management and wealth management activities conducted by Deutsche Bank AG or any of its subsidiaries. Clients will be provided Deutsche Asset & Wealth Management products or services by one or more legal entities that will be identified to clients pursuant to the contracts, agreements, offering materials or other documentation relevant to such products or services. DWS Investments Distributors, Inc. 222 South Riverside Plaza Chicago, IL service@db.com Tel (800) Deutsche Asset & Wealth Management. All rights reserved. PM (9/13) R FI-TRIFECTA