After Wednesday’s Federal Reserve meeting, it’s pretty clear that the central bank isn’t going to increase interest rates any time soon. The drawback to low rates, of course, is that the yields on many categories of fixed income will stay low, often below the rate of inflation. Investors are losing purchasing power as a result—even as they seek safety. As we can see from this week’s OppChart, investors need to look beyond traditional fixed income sectors to generate real income. One option, international debt, offers foreign exchange exposure that may protect against dollar weakness and a potential hedge against the effects of import price inflation. Senior loans also currently offer higher real yields than government bonds and may help manage the risks associated with rising interest rates. Both of these asset classes have more credit risk than ordinary U.S. government debt, but they may reward investors with yields well above inflation.
REITs and Master Limited Partnerships (MLPs) are designed not only generate income solutions for investors but also seek equity-like capital appreciation. REITs may provide an investor with a potential dividend stream derived from the rents paid on the underlying property, and potential price appreciation from the anticipated increase in value of the real estate owned. Both sources of return tend to keep pace with real estate values and rents, and may protect an investor’s purchasing power from rising rents and home prices. MLPs also seek to pay dividends based on royalties from oil and gas transit agreements, which may help protect an investor’s purchasing power against inflation threats from higher fuel prices.
Owning all of these asset classes could help an investor build a balanced portfolio designed to generate real income and protect an investor’s purchasing power better than the current core of government related bonds.
Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall. Investments in securities of real estate companies may be especially volatile. Because they do not have an active trading market, shares of Real Estate Investment Trusts (REITs) may be illiquid. The lack of an active trading market may make it difficult to value or sell shares of REITs promptly at an acceptable price. 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 and political and economic uncertainties. Emerging and developing market investments may be especially volatile. Senior loans are typically lower-rated (more at risk of default) and may be illiquid investments (which may not have a ready market).Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution, and voting rights. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. MLPs are subject to significant regulation and may be adversely affected by changes in the regulatory environment including the risk that an MLP could lose its tax status as a partnership.
Treasuries are represented by the Barclays Capital U.S. Aggregate Treasury Index. Agencies are represented by the Barclays Capital U.S. Aggregate Agencies Index. CMBS are represented by the Barclays Capital U.S. Aggregate Commercial Mortgage Backed Securities Index. Agency MBS are represented by the Barclays Capital U.S. Aggregate Agency Mortgage Backed Securities Index. Corporates are represented by the Barclays Capital U.S. Credit/Corporate/Investment Grade Bond Index. These indices represent their respective sectors of the Barclays Capital U.S. Aggregate Bond Index.
Barclays Capital U.S. Aggregate Bond Index is a U.S. investment-grade bond index.
REITs are represented by the FTSE NAREIT Equity REITs Index which is an index consisting of certain companies that own and operate income-producing real estate that have 75% or more of their respective gross invested assets in the equity or mortgage debt of commercial properties.
Emerging Market Debt is represented by the JPMorgan GBI-EM Diversified Index which is a global local emerging markets index, consisting of regularly traded, liquid fixed rate, domestic currency government bonds.
MLPs are represented by the Alerian MLP Index which is a composite of the 50 most prominent energy Master Limited Partnerships (MLPs).
Senior Loans are represented by the Credit Suisse Leveraged Loan Index which tracks the performance of senior loans.
High Yield is represented by the JPMorgan Domestic High Yield Index which is an index composed of noninvestment-grade corporate bonds
Each index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any Oppenheimer fund. Past performance does not guarantee future performance.