Many fixed-income asset classes seek to deliver consistent income and competitive returns. But we believe that only investment-grade debt may help deliver “ballast” to contribute to a portfolio’s stability—especially in volatile periods.
Our investment-grade debt strategies aim to achieve this objective on a number of levels:
- Risk management: We operate within a risk-controlled framework that can help us identify diversified sources of alpha1 without making any material interest rate or yield curve bets. We also tend to avoid owning emerging market bonds and deep high-yield bonds that are rated B and below. We believe the risk profiles of these two sectors are not appropriate for investment-grade debt portfolios.
Our risk framework is rigorous, and it has three key components:
- Multi-dimensional risk limits, which are established at the portfolio, sector and security levels.
- A risk-budgeting approach with regard to sector allocation that allows us to better measure and track the risks we want to undertake in the portfolio.
- Stop-outs, which are predetermined buying or selling actions that can help neutralize positions that stray away from our initial view.
- A shorter time horizon: We employ a shorter-term horizon of 6-12 months. This time frame helps us better manage portfolios for periods of unexpected volatility.
- Sector diversification: We actively allocate across sectors that include corporate bonds, agency and non-agency residential mortgages, commercial mortgages, and asset-backed securities.
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- ^Alpha measures the difference between a fund’s actual and expected returns, based on beta, and is generally used as a measure of a manager’s added value over a passive strategy.
The mention of specific securities or sectors does not constitute a recommendation on behalf of any fund or OppenheimerFunds, Inc.
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. Mortgage-backed securities are subject to prepayment risk. Asset-backed securities are subject to prepayment risk. Diversification does not guarantee profit or protect against loss.
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 the portfolio manager at 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.