Navigating Rising Rates with Active, Multi-Sector Fixed Income Management

Navigating Rising Rates with Active, Multi-Sector Fixed Income Management

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With bond yields near 60-year lows and expected to rise, U.S. core bond investors are increasingly questioning how to mitigate interest rate risk. Should they take a passive, indexbased, less-diversified approach or look to a more active, multi-sector, dynamic strategy? We believe today s bond market and yield environment favors a value-driven, actively-managed, multi-sector approach to fixed income investing. This type of flexible approach can invest in a much larger opportunity set within the fixed income universe, including floating rate sectors, municipal bonds, insurance-linked securities, convertible bonds, select non-investment grade securities, and non-u.s. bonds. As a result, it can deliver better risk-adjusted returns than an index-based strategy that is typically heavily weighted towards government bonds, such as the Barclays U.S. Aggregate Bond Index (the Index). 1 While fixed income indices may be appropriate as benchmarks, we believe they are less desirable as investment strategies especially in a rising rate environment. U.S. Treasuries, the most rate sensitive asset class, represent over 36% of the market value of the Index. An additional 28% of the Index is held in agency mortgage-backed securities. With their U.S. government-guarantees, they offer only modest spreads to help mitigate rate risk, but are also negatively convex 2, which can hurt performance in rising rate environments. An index-like portfolio may not have sufficient diversification to avoid losses when interest rates rise. 3 The high rate sensitivity of the component parts of the Index is exacerbated by its higher duration. Over the past year, the Index exhibited its highest duration level, and together with near record low yields, had the greatest downside exposure to rising interest rates relative to its 30-year history. 4 Barclays U.S. Aggregate Bond Index: Duration and Yield History Duration (Years) 8 7 6 5 4 3 2 1 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 8 7 6 5 4 3 2 1 0 2015 Yield (%) Barclays Aggregate Duration Barclays Aggregate Yield-to-Worst Source: Barclays, Pioneer Investments. Quarterly, last data point 6/30/14. 1 Source: Pioneer Investments, as of 6/30/15. The Barclays U.S. Aggregate Bond Index is a measure of the U.S. bond market. Index returns assume reinvestment of dividends, and unlike Fund returns, do not reflect any fees of expenses. You cannot invest directly in an index. 2 Convexity Measures the rate of change of a bond s duration as interest rates change. Duration measures a bond s price sensitivity to a change in interest rates. Convexity may be positive or negative, depending on the characteristics of the underlying bonds. 3 Diversification does not assure a profit or protect against a loss. 4 Duration is a measure of the sensitivity of the price (the value of principal) of a fixed income investment to a change in interest rates, expressed as a number of years. 5 Yield-to-Worst is the lowest potential yield that can be received on a bond without the issuer defaulting. 3

The current downside risk of the Barclays U.S. Aggregate Bond Index is depicted below, relative to five and 10 years ago. Rising Rates Pose Greater Risk to Investors than in Past Periods Interest Rates Rising 1% Total Return 6, 7 Duration (years) Yield to Worst (%) One Year One Day 10-Year 12/31/2004 4.3 4.4-0.1% -4.3% 5-Year 12/31/2009 4.6 3.7-0.9% -4.6% Current 6/30/2015 5.6 2.4-2.4% -5.6% Source: Barclays and Pioneer Investments. Not representative of any Pioneer product. 6 Assumes no change in spread*, and assumes yield to worst. 7 Reflects benefit of roll-down. Roll-down return is a form of return that arises when the value of a bond converges to par as maturity is approached. The size of the roll-down return varies greatly between long and short-dated bonds. Roll-down is smaller for long-dated bonds (those with maturities of generally 15 years or more) that are trading away from par compared to bonds that are short-dated (those with maturities of 5 years or less). * Credit spreads are commonly defined as the differences in yield between Treasuries and other types of fixed-income securities with similar maturities. Active multi-sector management can offer higher income and mitigate interest rate risk by investing in fixed income sectors less correlated with interest rates. 8 Unlike indexed managers, active multi-sector managers have the ability to construct portfolios with a view to absolute as well as relative risk. They consider the interactions and correlations of all risk factors, including interest rate, credit, country, sector, industry, and issuer in building portfolios rather than passively accepting the increasingly risky profile of the Index. As the following allocation charts indicate, Pioneer Bond Fund reflects dynamic allocations across a broad range of fixed income asset classes, compared to the less diversified and more static allocation of the Barclays U.S. Aggregate Bond Index (the Fund benchmark). Pioneer Bond Fund: Historical Allocations 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% U.S. High Yield* Emerging Markets Cash Treasury Agency Mortgage- - Backed Securities Jul-03 Dec-03 May-04 Oct-04 Mar-05 Aug-05 Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 Municipals Non-Agency Mortgage Backed Securities - Asset-Backed Securities Commercial Mortgage Backed Securities - U.S. Investment Grade Bank Loans International Investment Grade Convertible Securities Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Jun-15 3% 7% 2% 20% 11% 5% 7% 24% 6% 3% 9% 3% Source: Pioneer Investments as of 6/30/15. The Fund is actively managed; sector allocations will vary over other periods and do not reflect a commitment to an investment policy or sector. *Includes Event-Linked Bonds (3%), International High Yield (0%) and Preferred and Common Stock (1%). 8 Correlation The degree to which assets or asset class prices have moved in relation to one another. Correlation ranges from -1 (always moving in opposite directions) through 0 (never move together) to 1 (always move together). 4

Barclays U.S. Aggregate Bond Index: Historical Allocations 100% 90% 80% Treasuries 36.1% 70% 60% Agencies 4.9% 50% 40% 30% Agency MBS 28.1% 20% 19.8% Investment Grade Corporate 10% Yankees 9.1% 0% ABS/CMBS 1.9% 2003 2006 2009 2012 2015 Source: Barclays. As of 6/30/15. In rising interest rate environments, Pioneer Bond Fund uses a number of levers to mitigate rate risk, and is positioned as follows, as of June 30, 2015: Seeks higher yield than the Index: Yield can help offset principal loss from rising rates. The Fund seeks to achieve this higher yield by having greater exposure to spread sectors and underweighting government sectors. Pioneer Bond Fund (Y Share) yielded 2.50% vs. Barclays U.S. Aggregate Bond Index 2.39%. Underweight to most rate sensitive assets: U.S. Treasuries comprise 7% of Pioneer Bond Fund portfolio vs. 36% in the Barclays U.S. Aggregate Bond Index. Floating rate exposure: Approximately 21%, includes allocations to bank loans, non-agency asset-backed securities (home equity loans), and event-linked (catastrophe) bonds. Overweight to credit: Up to 20% (currently 15%) diversified non-investment grade exposure. High yield has averaged 0.5% interest rate sensitivity over time, compared to U.S. Treasuries. Interest rate factor positioning: Duration of 4.4 years vs. 5.6 years for the Index, barbelled yield curve positioning, and up to 15% non-u.s. exposure (currently 11%) is designed to reduce exposure to rising rates in the U.S. Investors, particularly those with short time horizons and a low tolerance for risk, have the choice in a rising rate environment to simply invest in cash at almost zero yields. We believe an attractive solution for fixed income investors in a rising rate environment, and just as importantly over the longer term, is to invest in an intermediate strategy that can add value through dynamic allocation and security selection. This strategy can diversify risk across a broad range of fixed income asset classes when the market compensates for those risks, and can reduce risk exposure when the market does not pay for those risks. 5

As illustrated below, Pioneer Bond Fund Y Share has a proven record of outperformance in rising interest rate environments, relative to both the Index and to the median manager. Pioneer Bond Fund in a Rising Rate Environment Federal Reserve raised rates by 4.25% over two years June 1, 2004 June 30, 2006 2013: The 10-Year Treasury rose from 1.75% to 3.01% January 2013 December 2013 5% Barclays U.S. Aggregate Morningstar Intermediate-Term Bond Category Average Pioneer Bond Fund (Y at NAV) 2% Barclays U.S. Aggregate Morningstar Intermediate-Term Bond Category Average Pioneer Bond Fund (Y at NAV) 4% 1% 3% 3.97 0% 0.66 2% 3.09 2.66-1% -2.02-1.38 1% -2% 0% -3% Source: Pioneer Investments and Morningstar. Past performance is no guarantee of future results. Outperforming When Rates Fall Pioneer Bond Fund demonstrated in 2014 that even when rates did not rise, its diversified investment approach still delivered outperformance of its Index and peers, despite holding a relative short duration position. The Fund (Y Shares) returned 6.19% for the calendar year 2014 compared to the Index return of 5.97%. Indeed, the Fund has demonstrated long-term outperformance of the Index and of its universe over different interest rate, economic, and credit environments, using its dynamic and diversified approach. As the following tables demonstrate, the Pioneer Bond Fund has achieved attractive returns vs. its Morningstar Category Average and the Barclays U.S. Aggregate Bond Index. 6

Intermediate-Term Bond Universe as of June 30, 2015 Average Annual Total Returns and Ranks 1-year return 3-year return Rank 5-year return Rank 10-year return Rank Pioneer Bond Fund Y Shares 1.59 3.76 9 4.95 11 5.39 9 Pioneer Bond Fund A Shares (NAV) 1.32 3.55 11 4.72 15 5.10 17 Pioneer Bond Fund A Shares (POP) -3.29 1.97 55 3.77 46 4.62 36 Active Universe Average* 0.96 2.35 44 3.78 47 4.27 54 Benchmark: Barclays U.S. Aggregate Bond Index 1.86 1.83 67 3.35 66 4.44 46 Gross expense ratio (A): 0.92%. Net expense ratio (A): 0.85%. Contractual expense waiver expires 11/1/15. Gross expense ratio (Y): 0.58%. * Active Universe is the Morningstar Intermediate Term Bond Category Average minus the passive funds. Source: Pioneer Investments, Morningstar Morningstar Intermediate-Term Bond Category: Number of investments in universe for 3-, 5- and 10-year: 905, 803 and 584, respectively. 1-year Morningstar return rankings are not applicable. Call 800-225-6292 or visit us.pioneerinvestments.com for the most recent month-end performance results. Current performance may be lower or higher than the performance data quoted. The performance data quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. The Barclays U.S. Aggregate Bond Index is a measure of the U.S. bond market. The Morningstar Intermediate-Term Bond average measures the performance of intermediate-term bond funds. Indices are unmanaged and their returns assume reinvestment of dividends and, unlike mutual fund returns, do not reflect any fees or expenses associated with a mutual fund. It is not possible to invest directly in an index. NAV results represent the percent change in net asset value per share. POP returns reflect deduction of a maximum 4.50% sales charge. Class Y shares are not subject to sales charges and are available for limited groups of investors, including institutional investors. All results are historical and assume the reinvestment of dividends and capital gains. Other share classes are available for which performance and expenses will differ. Performance results reflect any applicable expense waivers in effect during the periods shown. Without such waivers, Fund performance would be lower. Waivers may not be in effect for all funds. Certain fee waivers are contractual through a specified period. Otherwise, fee waivers can be rescinded at any time. See the prospectus and financial statements for more information. Pioneer Bond Fund Y Share has achieved these returns with generally lower volatility than its peers and with volatility similar to the Index. This focus on risk and return has enabled the Fund to deliver top decile Sharpe ratios over all annualized time periods relative to its peers. Intermediate-Term Bond Universe as of June 30, 2015 Standard Deviation Sharpe Ratio 3-year 5-year 10-year 3-year 5-year 10-year Pioneer Bond Fund (Y Shares) 2.46 2.38 3.51 1.50 2.02 1.10 Active Universe Average* 3.02 2.91 3.98 0.78 1.28 0.75 Benchmark: Barclays U.S. Aggregate Bond Index 2.95 2.82 3.29 0.61 1.16 0.91 Source: Morningstar, Pioneer Investments Standard deviation and Sharpe ratios of less than three years are not considered statistically relevant. The Morningstar (MSTAR) Intermediate-Term Category Average measures the performance of funds in the intermediate-term bond universe. Indices are unmanaged and their returns assume reinvestment of dividends and, unlike mutual fund returns, do not reflect any fees or expenses associated with a mutual fund. It is not possible to invest directly in an index. Sharpe ratio is a risk-adjusted measure calculated to determine reward per unit of risk. It uses a standard deviation and excess return. The higher the Sharpe Ratio, the better the portfolio's historical risk-adjusted performance. Standard deviation is a statistical measure of the historic volatility of a portfolio; a lower standard deviation indicates historically less volatility. 7

The following copyright pertains only to the Morningstar information. The Morningstar information contained herein: (1) is proprietary to Morningstar; (2) may not be copied; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. 2015 Morningstar, Inc. All Rights Reserved. A Word About Risk When interest rates rise, the prices of fixed income securities in the Fund will generally fall. Conversely, when interest rates fall, the prices of fixed income securities in the Fund will generally rise. Investments in the Fund are subject to possible loss due to the financial failure of issuers of underlying securities and their inability to meet their debt obligations. Prepayment risk is the chance that an issuer may exercise its right to prepay its security, if falling interest rates prompt the issuer to do so. Forced to reinvest the unanticipated proceeds at lower interest rates, the Fund would experience a decline in income and lose the opportunity for additional price appreciation. Investments in high yield or lower rated securities are subject to greater-than-average price volatility, illiquidity and possibility of default. The securities issued by U.S. Government-sponsored entities (e.g., FNMA, Freddie Mac) are neither guaranteed nor issued by the U.S. Government. The portfolio may invest in mortgage-backed securities, which during times of fluctuating interest rates may increase or decrease more than other fixed income securities. Mortgage-backed securities are also subject to prepayments. At times, the Fund s investments may represent industries or sectors that are interrelated or have common risks, making them more susceptible to any economic, political, or regulatory developments or other risks affecting those industries and sectors. These risks may increase share price volatility. Please see the prospectus for a more complete discussion of the Fund s risks. Please consider the Fund s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about the Fund and should be read carefully before you invest or send money. To obtain a prospectus or summary prospectus and for other information on any Pioneer fund, call 1-800-225-6292 or visit our web site at us.pioneerinvestments.com. Neither Pioneer, nor its representatives are legal or tax advisors. In addition, Pioneer does not provide advice or recommendations. The investments you choose should correspond to your financial needs, goals and risk tolerance. For assistance in determining your financial situation, please consult an investment professional. Securities offered through Pioneer Funds Distributor, Inc., 60 State Street, Boston, Massachusetts 02109 Underwriter of Pioneer mutual funds, Member SIPC 2015 Pioneer Investments us.pioneerinvestments.com 28669-00-0815