Given three recent Federal Reserve rate hikes and the potential for more to come, we believe it may be prudent for Defined Contribution (DC) plan fiduciaries to diversify investment menus by considering satellite fixed income options to complement to core bonds. Core bond allocation can act as “ballast” in a portfolio and typically forms the foundation of a portfolio’s duration, yield and income structure. Satellite fixed income options such as High Yield Bonds, Senior Loans, Emerging Markets Debt and International Bonds are usually added to investment menus in an effort to provide a potential solution for higher yield, return, mitigation against risk, and/or diversification benefits.
Fixed income investing entails credit and interest rate risks. Interest rate risk is the risk that rising interest rates or an expectation of rising interest rates in the near future, will cause the values of a fund's investments to decline. Risks associated with rising interest rates are heightened given that rates in the U.S. are at or near historic lows. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall. Below-investment-grade (“high yield” or "junk") bonds are more at risk of default and are subject to liquidity risk. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile. Senior loans are subject to credit, interest rate and prepayment risk, are typically lower-rated and may be illiquid investments (which may not have a ready market). Diversification does not guarantee profit or protect against loss.
OppenheimerFunds does not recommend any specific asset allocations. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns and does not assure a profit or protect against loss. Each investor's portfolio must be constructed based on the individual's financial resources, investment goals, risk tolerance, investing time frame, tax situation and other relevant factors.
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.