Core Bond Funds- Know What You’re Investing In (Wells Fargo)

August 2014

KEYWORDS: core bonds, allocations, investments, equities, retirement funds

Authors:

Wells Fargo

Organizations:
  • Wells Fargo

Summary:

Just about every retirement plan participant will likely have an allocation to core bonds at some point. However, we’ve noticed an important trend in Morningstar’s intermediate term bond category within which the core bond strategies fall. A significant number of funds within the category seem to have boosted their total returns by dipping lower in credit quality, adding considerable amounts of high-yield debt.

In our assessment, participants who are seeking the diversification benefits and risk parameters of a true core bond strategy may be unknowingly taking on unintended asset class exposure by selecting funds that use core-plus allocations to increase returns. It’s important to know the distinctions among the funds and to be able to identify the right attributes when selecting a style-pure core bond strategy. In this paper, we review the diversification benefits of core bonds, compare the correlations of various fixed income asset classes with equities, and discuss ways to identify and select a true core bond strategy.