Finding Your Way Through the Bond Market

Transcription

1 ederated Finding Your Way Through the Bond Market Federated Fixed-Income Capabilities NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE

2 Fixed-Income Investments Invesrs are living in an uncertain world Consider Greece. Or Russia. Or even Japan. Every few months, it seems, geopolitical tensions and economic stumbles arise in this part of the world or that, raising questions about the stability of specific countries and entire regions. Or consider interest rates, despite rising public debt and an expanding economy facrs that hisrically have put upward pressure on interest rates they have remained relatively low across the yield curve. Or consider U.S. scks. Even though the carnage of the past decade is behind them the S&P 500, the Dow and the Nasdaq have all set new highs retail invesrs appear unconvinced as many domestic equity mutual funds continue experience net outflows. In this seemingly skittish environment, day s bond market offers a broad array of opportunities meet what many individual invesrs may be looking for a place invest their money that may be relatively less volatile than other asset classes. Federated 1

3 Benefits of having bonds in a portfolio Bonds may reduce risk. Generally, bonds don t move in tandem with scks, so they may reduce the overall risk of an investment portfolio. That makes bonds an important diversification ol. In Periods of Sck Market Decline of 15% or More, Bonds Outperformed 7/17/1998 8/31/1998 9/1/2000 4/4/2001 5/21/2001 9/21/2001 1/4/2002 7/23/2002 8/22/ /9/ /9/2007 3/10/ /4/ /20/2008 4/23/2010 7/2/2010 4/29/ /3/2011 Source: Morningstar, Inc. Past performance is no guarantee of future results. This chart is for illustrative purposes only and is not representative of performance for any specific investment. Scks are represented by the S&P 500 Index. Bonds are represented by the Barclays U.S. Aggregate Bond Index. Bonds may provide a regular source of income. Virtually all of the interest income received by a bond portfolio is distributed shareholders each month.that s real income that invesrs can use or reinvest. 2 Federated Diversification does not assure profit nor protect against loss.

4 Bonds have the potential for less volatility. The worst declines in bonds were modest compared the worst doubledigit drops in scks over the past 15 years. In addition, bond portfolios may hold dozens or even hundreds of securities of differing maturities, credit quality and market secrs. As a result of this diversification, the effect of one bond s loss in value on the entire portfolio is not nearly as great as it would be for an invesr who held only a single bond. Bonds Less Volatile Than Scks 28.67% 26.47% 32.37% 21.03% 11.63% 8.44% 10.25% 10.87% 4.91% 15.78% 6.97% 5.24% 15.08% 7.84% 15.99% 13.66% -0.82% -9.10% % 4.10% 4.34% 2.43% 4.33% 5.49% 5.93% 6.54% 2.09% 4.22% -2.02% 5.97% % % Source: Lipper, Inc. (12/31/98-12/31/14) Past performance is no guarantee of future results. This chart is for illustrative purposes only and is not representative of performance for any specific investment. Scks are represented by the S&P 500 Index. Bonds are represented by the Barclays U.S. Aggregate Bond Index. Bonds can deliver tax benefits. Income from municipal bonds is exempt from federal taxes, and for individuals who live in the same state as the agency issuing the bond, the income may be exempt from their state income tax, o. Some bonds also pursue interest income that is exempt from the federal alternative minimum tax (AMT). Federated 3

5 Seeking income in more ways Through the creation and use of a growing set of products and strategies meet invesrs varying needs, day s bond market is ever-changing and complex. There are ultrashort bond funds 1 that offer a place for invesrs park cash and potentially receive a return; government and government-backed mortgage bonds that offer the potential outpace future inflation while generating current income; municipal bonds that offer tax advantages; corporate bonds that offer a way participate in the private secr with potentially less risk than with scks; and multi-secr, high-yield and emerging-market bonds that carry more risk for the potential benefit of higher income and appreciation. Bonds Offer Various Returns With Different Risks 2 4 Federated 1 Ultrashort bond funds are not money market mutual funds. A money market mutual fund attempts maintain a stable net asset value through compliance with relevant Securities and Exchange Commission (SEC) rules. Ultrashort bond funds are not governed by those rules, and their shares will fluctuate in value and loss of principal is possible. 2 Without regard changes in interest rates of the bond market. Bond prices are sensitive changes in interest rates and a rise in interest rates can cause a decline in their prices. High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risks, and may be more volatile than investment-grade securities. International investing involves special risks, including currency risk, increased volatility, political risks and differences in auditing and other financial standards. Prices of emerging markets securities can be significantly more volatile than the prices of securities in developed countries and currency risk and political risks are accentuated in emerging markets. The value of some mortgage-backed securities may be particularly sensitive changes in prevailing interest rates, and although the securities are generally supported by some form of government or private insurance, there is no assurance that private guaranrs or insurers will meet their obligations.

6 Making sense of the bond market In such a wide-ranging market, it can be difficult for invesrs understand all of their options and gain access valuable opportunities. Interest-rate changes, yield-curve uncertainties, domestic and global economic conditions and other variables can further complicate matters. That is why successful fixed-income management demands a flexible approach that can effectively navigate a complex marketplace gether with substantial resources and experience uncover opportunities that add value. Learn more about Federated s distinctive approach providing invesrs with the ability weather the market s ups and downs with a broad range of fixed-income solutions. Federated 5

7 An experienced team Alpha Pod Team Chairs Federated s approach managing fixed-income portfolios is guided by the experience and insight of our fixed-income investment team, with more than 20 portfolio managers averaging 25 years of experience. A disciplined investment process We employ a disciplined investment process that s transparent, repeatable and focused on creating the best balance between risk and reward. Federated s fixed-income management team assembles each portfolio bond by bond. Our fundamental research puts us in close contact with bond issuers across market secrs, and our quantitative portfolio teams have the experience evaluate them. MARK DURBIANO Secr Allocation DON ELLENBERGER Yield Curve Strategy Top Down Duration Management Secr Allocation Yield Curve Analysis Currency Management Portfolio Construction Performance Attribution R.J. GALLO Duration Management Security Selection Botm Up IHAB SALIB Currency Management 6 Federated

8 Follow the pods In managing fixed-income portfolios, Federated seeks the balanced application of critical decision-making ols or, as we refer them, alpha pods. Alpha pods are built around five crucial facrs in bond fund strategy: duration management, secr allocation, yield curve strategy, currency management and security selection. We isolate and approach the pods as separate management decisions each headed by a different member of our fixed-income team with a goal of generating maximum alpha, or return, from each pod. Individual pod decisions are then incorporated in the portfolio-building process. The objective is extract alpha from each stage of the decision-making process, using a diversified source of alpha generation that is not reliant on any one major facr or one particular point in the economic cycle. This approach, which is abetted by team members who have worked gether for years, creates a dynamic that encourages portfolio managers, analysts and traders interact and engage in the security evaluation and selection.this collaboration encourages the best thinking of our experienced professionals, enhancing their ability help invesrs meet their goals of preserving and growing their wealth. Proprietary research is critical virtually all of our investment decisions. Research analysts gather and interpret data using models developed and honed over decades.working closely with portfolio managers, they provide a constant stream of financial analysis and insight that is used help build portfolios that seek attractive returns at appropriate levels of risk. Taxable Fixed-Income Decision Tools Duration Management t The measure of a security s particular sensitivity interest-rate changes. Secr Allocation t Based on an evaluation of security categories that the team believes can deliver the most reward for the amount of risk taken. Yield Curve Strategy t A key determinant in how the fixed-income team structures their portfolios is based on how they believe the interest-rate yield curve may reshape. Currency Management t The team seeks exploit inefficiencies in currency values, interest rates and market trends maximize performance in our bond portfolios. Security Selection t Decisions are made only after an intensive, fundamentally focused review of every potential holding. Alpha measures a fund s risk-adjusted performance. It represents the difference between a fund s actual returns and its expected performance, given its level of risk. A positive value for alpha implies that the fund has performed better than would have been expected given its volatility. Federated 7

9 Federated s time-tested approach Building diversified portfolios through disciplined processes and proprietary fundamental research has long been Federated s calling card. Our time-tested approach fixed-income management and the ability of our experienced portfolio managers, analysts and traders successfully navigate tumultuous credit markets have proven beneficial our clients. The fact that Federated fixed-income portfolios were managed through the credit crisis with a relatively low tracking error the major indexes is testimony our commitment both monir and seek reduce risk for our clients. 8 Federated

10 To learn more about fixed-income investments call or visit FederatedInvesrs.com.

11 ederated Federated Invesrs, Inc. Federated Invesrs Tower 1001 Liberty Avenue Pittsburgh, PA Contact us at FederatedInvesrs.com or call (6/15) Federated Securities Corp., Distribur Federated is a registered trademark of Federated Invesrs, Inc Federated Invesrs, Inc. Invesrs should carefully consider the fund s investment objectives, risks, charges and expenses before investing. To obtain a summary prospectus or prospectus containing this and other information, contact us or visit FederatedInvesrs.com. Please carefully read the summary prospectus or prospectus before investing. Past performance is no guarantee of future results. Duration is a measure of a security s price sensitivity changes in interest rates. Securities with longer durations are more sensitive changes in interest rates than securities of shorter durations. Diversification does not assure a profit nor protect against loss. Barclays U.S. Aggregate Bond Index is an unmanaged index composed of securities from the Barclays U.S. Government/Corporate Bond Index, the Mortgage-Backed Securities Index and the Asset-Backed Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization. Investments cannot be made directly in an index. S&P 500 Index is an unmanaged capitalization-weighted index of 500 scks designed measure performance of the broad domestic economy through changes in the aggregate market value of 500 scks representing all major industries.