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PORTFOLIO STRATEGY RESEARCH | FEBRUARY 2013

THE CORE CONUNDRUM


As U.S. monetary policy continues to artificially depress yields on government-related securities, traditional core fixed-income strategies have proven less effective in achieving total return objectives. Compounding this issue is the flagship fixed-income benchmark, which has become heavily concentrated in government and agency debt. As benchmark yields languish around 1.9 percent, the chasm between investors return targets and current market realities deepens. Bridging this gap, without assuming undue credit or duration risk, requires a shift away from the traditional view of core fixed-income management in favor of a more diversified, multi-sector approach. An increased tolerance for tracking error provides the flexibility to increase allocations to undervalued yet high-quality credits across sectors. We believe this approach offers a more sustainable way to improve total risk-adjusted returns in todays low-rate environment.

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OVERVIEW

Report Highlights

The combined impact of U.S. monetary and fiscal policy has created the core conundrum: How can core fixed-income investors meet their yield objectives while maintaining low tracking error to the Index, which has become approximately 75 percent concentrated in low-yielding government-related debt? The benign credit environment is encouraging investors to take investment shortcuts, such as increasing credit and duration risk, to generate yield. History has shown that the market has a tendency to underestimate these risks, particularly during periods of monetary policy accommodation. In the current environment, we believe the surest path to underperformance is to remain anchored to the past. Investors must develop a new, sustainable, long-term strategy to generate yield without assuming excessive credit or duration risk. Accessing short-duration, investment-grade quality securities with considerable yield pickup relative to government and corporate bonds may be the investment blueprint needed to navigate the current low-rate environment and hedge against interest rate risk.
CONTENTS INVES TMENT PROFESSIONAL S

SEC TION 1 The Core Conundrum

B. SCOT T MINERD Chief Investment Officer ERIC S. SILVERGOLD Senior Managing Director, Portfolio Manager KELECHI C. OGBUNAMIRI Associate, Investment Research

SEC TION 2 7 Coping with New Market Realities SEC TION 3 Future Investment Blueprint 10

ANNE B. WALSH, CFA Assistant Chief Investment Officer, Fixed Income JAMES W. MICHAL Director, Portfolio Manager

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SEC TION 1

The Core Conundrum

In an environment where the benchmark index is heavily concentrated in low-yielding government and agency securities, maintaining low tracking error and pursuing total return targets have seemingly become contradictory objectives. In the following section, we will discuss how recent monetary and fiscal policy has created this conundrum for core fixed-income investors.
Monetary Policy Distorting Government and Agency Markets Having reached the limits of conventional monetary policy, quantitative easing (QE) has become the preferred tool for U.S. central bankers to keep interest rates artificially low in hopes of stimulating the economy. Over the past five years, the total aggregate assets on the Federal Reserves balance sheet increased by a staggering 225 percent (compared to 22 percent over the previous five-year period). Recognizing that the Feds asset purchases are entirely policy-driven and contrary to natural market dynamics, investors should pause to fully appreciate the attendant implications. Whenever there is an uneconomic buyer making large-scale investment decisions irrespective of price, market distortions are inevitable. Artificially low yields have long been the case with Treasuries, and this distortion is increasingly true for agency mortgage-backed securities (MBS), which have been purchased at the rate of $40 billion per month since the start of QE3 in September 2012. With the start of an additional $45 billion per month Treasury purchase program beginning in January 2013, and the Feds statement that highly accommodative monetary policy will continue at least until specific unemployment or inflation targets are reached, Treasury and agency MBS markets are likely to remain distorted throughout the next several years. Today, these overbought asset classes currently represent nearly 75 percent of the Barclays U.S. Aggregate Bond Index.

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The Impact of the Financial Crisis Rise in U.S. Treasury Debt Outstanding since the Financial Crisis
$20Tn 2001 2006 46% 2007 2012 162% projected 68%

$15Tn

$10Tn

$5Tn

$0Tn 1980

1984

1988

1992

1996

2000

2004

2008

2012

2016

2020

2022

As the U.S. governments fiscal deficit soared from 1.3 percent of GDP in 2007 to 10.4 percent of GDP by 2009, the resulting impact was a significant rise in Treasury issuance. Treasury debt outstanding grew from $4.5 trillion in 2007 to $11.3 trillion by the end of 2012. The Congressional Budget Office (CBO) projects an additional 68 percent increase to $18.9 trillion over the next ten years.
Source: SIFMA, Congressional Budget Office. Data as of 12/31/2012.

The Evolution of the Core Fixed-Income Universe Reweighting of the Universe toward Risk-Free Assets

19.0%

Treasuries Agency MBS Agency Bonds Investment-Grade Bonds Non-Agency MBS Taxable Municipals ABS

34.5%

2007

2012

The massive increase in Treasury debt has reshaped the core fixed-income universe. Since bottoming in 2007 at 19 percent of core bonds outstanding, Treasuries nearly doubled to 35 percent of the universe by 2012. Combined with agency debt, U.S. government assets now comprise almost two-thirds of the core fixed-income universe, and nearly 75 percent of the Barclays Agg.
Source: SIFMA, Credit Suisse. Data as of 12/31/2012.

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Assessing the Relative Value of the Barclays Agg Historical Yield per Unit of Duration
4%

3%
12/31/2012

0.3 %

2%

1%

0% 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Currently, the Barclays Agg is the least attractive it has ever been as measured by yield per unit of duration. Given the Feds recent pledge to keep rates low at least until specific unemployment or inflation targets are reached, the Indexs unattractiveness from an investment standpoint is likely to continue in the near term. Source: Barclays. Data as of 12/31/2012.

Fiscal Policy Reconfiguring Composition of Barclays Agg Since its creation in 1986, the Barclays U.S. Aggregate Bond Index (the Index or the Agg) has become the most widely used proxy for the U.S. bond market with over $2 trillion in fixed-income assets managed to it. Inclusion in the Agg requires that securities be U.S. dollar-denominated, investment-grade rated, fixed-rate, taxable, and meet minimum par amounts outstanding. In 1986, the fixed-income landscape primarily consisted of U.S. Treasuries, agency bonds, agency MBS, and corporate bonds all of which met these inclusion criteria. Therefore the Agg was a useful proxy for

the universe of fixed-income assets. However, the fixed-income universe has evolved over the past twenty years with the growth of sectors such as asset-backed securities and municipals. Over the past five years, the composition of the Barclays Agg has been altered by the massive volume of Treasuries issued in response to the U.S. financial crisis. The sheer glut of Treasuries and their increasingly dominant representation in the Index is a trend unlikely to reverse anytime soon. The need to fund government shortfalls present and future is astonishing. The U.S. Treasury debt

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balance totaled $4.5 trillion in 2007. By the end of 2012, it had skyrocketed to $11.3 trillion. Yet, it is projected to go even higher hitting $18.9 trillion by 2022, according to estimates from the Congressional Budget Office. As Treasuries climbed from 19 percent of the core fixed-income universe to 35 percent over the last five years, the marketcapitalization weighted Agg has followed suit. Treasuries currently comprise 37 percent of the Agg, and combined with agency debt, total U.S. government-related debt comprises nearly 75 percent of the Index with a weighted-average yield of 1.6 percent, as of January 31, 2013.

Anchored to a benchmark heavily allocated to sectors yielding negative real rates of return has forced investors to reassess the traditional, benchmark-driven approach to core fixed-income management. While historically, core strategies have had negligible exposure to leveraged credit, emerging-market debt, and non-agency structured credit all of which are typically higher yielding and commensurately, higher risk segments of the fixed-income universe this aversion to riskier assets appears to be waning given the need for yield. In the next section, we will analyze the strategies being employed to generate yield, as investors adjust to new market realities.

Scarcity of Yield across Fixed-Income Landscape Historically Low Yields across Traditional Core Sectors
18% 15% 12% 9% 6% 3% 0%
Sector Weight

7.3% 5.0% 5.5% 3.3% 1.9% 1.0% ABS 0.4% Municipals 1.4% Historical Low 1.8% 5.5%

8.0% 6.6%

7.9%

4.5% 2.8% 0.9% Corporates 21.6% Treasuries 36.6% Agency MBS 29.4% 2.5% 1.1% Agency Bonds 8.9%

Barclays Agg 100.0%

CMBS 1.8% Current

Historical High

Historical Average

With the average yield of the Barclays Agg at 1.9 percent, and 75 percent of the Index allocated to Treasuries, agency MBS, and agency bonds, investors with minimum yield targets have nowhere to hide within the Index and benchmark-driven strategies may continue to fall short of the yield requirements for most institutional investors. Source: Barclays. Data as of 01/31/2013.

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SEC TION 2

Coping with New Market Realities


As institutional investors evaluate their need to generate yield, a softening stance toward tracking error appears to be emerging, industry-wide. Traditional yield enhancement techniques, such as increasing duration and lowering credit quality, may boost total returns in the near term, but at what cost? Currently, benign credit conditions may be overshadowing the potentially deleterious, long-term effects of higher credit and interest rate risk.
Prioritizing Yield Targets For investors who service their cash liabilities through the income stream generated from their bond portfolios, relative performance to an Index, that finished 2012 with a total return of 4.2 percent and a yield of 1.7 percent, is of secondary importance, and in some cases, inconsequential. For institutional investors, such as insurance companies, pension funds, and endowments, absolute yields and returns are preeminently important. While several prominent pension funds recently lowered portfolio return estimates by 25 to 50 basis points, these diminutive cuts appear largely symbolic in nature as they fail to address the investment shortfall concerns emanating from this persistent, low-rate environment. Despite historically low yields, materially lowering investment return targets is simply not a viable option for particular investor classes. As portfolio return targets remain unhinged from current market yields, many investors have begun assuming increased investment risks. Demand for yield has precipitated a relaxation in underwriting standards and eased the availability of credit. For example, during 2012, the investment-grade and high-yield bond markets set records for issuance. Particularly in the highyield market, there was a significant increase in deals lacking covenant protection; volume from lower-rated, first-time issuers; and aggressive deal structures. The negative, long-term impact of

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these worsening trends in new issuance is currently being obscured by the benign credit environment, a by-product of the Feds unprecedented monetary accommodation. As the Fed begins the fifth year of its zero-bound monetary policy, continued expectations for low rates would appear to mitigate the risk of extending duration in pursuit of incremental yield. However, using historical precedent as our guide, the market sometimes fails to effectively discount the potential for sudden monetary policy shifts.

Asymmetric Risk in Treasuries During the 1940s, the Fed, acting in concert with the Treasury Department, fixed interest rates on short-term Treasury bills while committing to buy long-term Treasury bonds in order to ensure cheap, adequate financing for World War II and the attendant recovery. The end of this practice, under the Treasury Accord of 1951, led to a tumultuous sell-off in longer-duration bonds as the market failed to anticipate the shift in monetary policy. Once the Fed inevitably begins removing excess

Historically, the End of Fed Intervention is Bad News for Bonds U.S. 10-Year Treasury Yields since 1800
15% 13% 11%
10-Year Treasury Yield

1 Rate Stability

2 Bear Market in Bonds

9% 7% 5% 3% 1% 1800 Treasury Accord 1815 1830 1845 1860 1875 1890 1905 1920 1935 1950 1965 1980 1995 2010

The removal of Fed support of bond prices at the long end of the curve in 1951 set off a bear market in bonds that lasted thirty years. Could history repeat itself once the current period of low rates ends? While we do not think this is imminently possible, future policy change is increasingly a concern.
Source: Bloomberg. Data as of 12/31/2012.

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Era of Return-Free Risk U.S. 10-Year Treasury One-Year Holding Period Returns
15% 10% 5% 0% -150 -100 -50 -5% -10% -15% -20%
Change in Interest Rates (Basis Points)
A 20 basis point move in rates wipes away the total return in 10-year Treasuries

Nominal Total Return

100

150

200

Purchasing 10-year Treasuries at current yields comes with considerable duration risk. Todays low coupon rates mean a 20 basis point rise in rates would lead to a negative total return over a one-year holding period. With the risk in Treasuries heavily skewed to the downside, we believe Treasuries have gone from offering risk-free returns to now effectively becoming return-free risk. Source: Bloomberg.
Data as 12/31/2012. The total return scenario is calculated based on the coupon rate of 1.625% and an effective duration of 9.1.

U.S. 10-Year Treasury One-Year Holding Period Total Returns

liquidity from the financial system, could a repeat of the 1950s occur? While we do not envision any sudden monetary policy shifts or a meaningful rise in rates in the near term, given where rates are today and how grossly overvalued Treasury securities have become, the risk to rates is clearly to the upside. At current coupon rates, a 20 basis point rise in rates would result in a negative total return on 10-year Treasuries over a one-year holding period. Based on the asymmetrical risk-return profile, we believe Treasuries have gone from offering risk-free returns to now effectively becoming return-free risk.

The dearth of yield within traditional core fixedincome sectors has resulted in an uptick in tracking error as investors increase allocations to riskier investments, such as emerging-market bonds and high-yield debt. According to eVestment Alliance, the average tracking error for core fixed-income strategies rose to 1.09 percent over the past three years ending December 2012, compared to 0.66 percent in the three-year period from 2005 to 2007. Given investors increased willingness to venture outside the traditional confines of core fixed-income, in the following section, we propose a more optimal method to generate attractive yields without sacrificing credit quality or extending duration.

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SEC TION 3

Future Investment Blueprint

While it may seem that increased credit and duration risk have become prerequisites to generate yield, there is a more sustainable, long-term strategy that relies on the ability to uncover quality, investment-grade opportunities outside of the traditional benchmark-driven framework.
Short-Duration Strategy Predicated on our view that the risk to interest rates is to the upside, we would advise investors to shorten portfolio duration and look for innovative ways to approach core fixed-income investing. Shortening duration offers a buffer against rising rates, but this generally comes at the expense of yield, particularly in corporate credit securities. The presumed positive correlation between yield and duration in the investment-grade universe has driven demand down the credit spectrum into lower-rated, high-yield bonds. A broader investment focus beyond the traditional core fixed-income framework demonstrates that lowering duration and producing attractive portfolio yields do not necessarily have to be mutually exclusive investment objectives. Within the investment-grade universe, floating-rate collateralized loan obligations (CLO) and shortduration asset-backed securities (ABS) offer similar yields to longer-dated corporate bonds with significantly less interest rate risk. While traditional securitizations of credit card receivables, student loans, and auto loans represent the majority of the ABS market, the sector has diversified into more specialized, niche segments of securities backed by various types of collateral, such as aircraft and shipping container leases, timeshare vacation ownership interests, and franchise fees. Largely owing to its association with the subprime crisis, these types of lesser-known, orphan credits suffer from a lingering negative connotation. The illiquidity and complexity of these non-traditional, off-therun sectors provide opportunities to generate yield in excess of comparably rated corporate credits. While corporate bond investors are exposed to the credit risk of a specific issuer or entity, idiosyncratic risks are mitigated in CLOs and ABS through large, diversified collateral pools. Additionally, these securities offer significant downside structural protection during stressed economic environments

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through overcollateralization, excess spread, reserve accounts, and triggers that cut off cash flows to subordinated tranches. Lastly, the amortizing structures of many asset-backed securities reduce credit exposure over time, while risks remain constant in corporate bonds due to their bullet maturities. Monetizing Complexity Despite the generally positive credit fundamentals in traditional ABS sectors, low nominal yields decrease the attractiveness of these segments.

These traditional sectors, which represent the lions share of the ABS exposure in the Barclays Agg, have a weighted-average yield of 1.0 percent. Yields on credit card ABS are currently below 1 percent, while yields on auto loans are between 1 and 2 percent. Although student loans offer slightly higher yields of 2 to 4 percent, the regulatory risk coupled with our belief that loan prepayments will be low, which would extend the average life of the securities to 10 to 15 years, significantly reduce their relative attractiveness.

Relative Value of ABS and CLOs vs. Corporate Bonds Spread Comparison between BBB-AA-rated ABS, A-rated CLOs, and BBB-A-rated Corporates
2,100bps 1,800bps

1,500bps

1,200bps

900bps CLO 600bps ABS 300bps Corporate 0bps 2002 2004 2006 2008 2010 2012

Largely owing to their association with the subprime crisis, CLOs and ABS frequently offer excess yield over corporate bonds given their increased complexity and illiquidity.
Source: JP Morgan, Bank of America Merrill Lynch. Data as of 12/31/2012.

Spread CLO ABS

High: 2,070 1,983

Low: 68 104 87

Avg: 460 431 199

Last: 315 200 163

Corporate 710

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Discovering Yield in the Investment-Grade Universe New Issue, Esoteric ABS Provide Yield without Increased Credit and Rate Risk
8%

6%

Barclays B Corporate Index Barclays BB Corporate Index

(A S&P / A Fitch)

Yield to Worst

4%

(A S&P / A Fitch) Barclays BBB Corporate Index Barclays A Corporate Index Barclays U.S. Aggregate Bond Index (AA) Barclays AA Corporate Index

BofA ML ABS Master BBB-AA Index

2%

0% 2 3 4 5 Duration 6 7 8

In the investment-grade complex, ABS is one sector offering leveraged credit-type yields without the commensurate credit risk. Additionally, the shorter duration of ABS securities relative to comparably rated corporate bonds offers greater protection against rising rates.
Source: Bloomberg, Bank of America Merrill Lynch, Barclays. Data as of 12/31/2012. Willis Lease is a U.S. public company and a major lessor of spare aircraft engines. BCP is a leading commercial bank in Peru.

We believe CLOs and ABS backed by aircraft leases are the two sectors currently offering the most attractive relative value. CLOs are benefitting from low bank loan default rates, healthier corporate balance sheets, and robust new loan issuance (nearly $300 billion in 2012). In the aircraft ABS space, the recent wave of restructurings and recapitalizations of U.S. airlines have resulted in improved profitability and lower fixed costs. Leasing rates have been supported through the increased demand from airlines that have chosen to lease rather than buy aircraft. In addition to our favorable view on the underlying collateral, aircraft ABS securities tend to be amortizing,

have shorter durations, and offer yields in excess of 6 percent on senior BBB tranches a premium of almost 300 basis points over corporate bonds. Due to the immense diversity and complexity of CLOs and ABS, however, ascertaining relative value requires in-depth analysis of both deal structure and the underlying collateral. Long-Duration Strategy For investors who need to maintain longer asset duration in order to match their liabilities, floatingrate CLOs or short-duration ABS can be combined with longer-duration, fixed-rate securities as part of a barbell strategy. (Barbell means to structure

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Barbell means to structure a portfolio with both short- and long-duration securities in order to achieve a desired duration target. With a barbell strategy, the negative impact of rising rates on the longer-duration, fixed-rate assets is partially offset by the positive benefit of higher interest coupons on floatingrate securities.

a portfolio with both short- and long-duration securities in order to achieve a desired duration target.) Utilizing this approach provides investors with yield advantages while still meeting portfolio duration objectives. With a barbell strategy, the negative impact of rising rates on the longerduration, fixed-rate assets is partially offset by the positive benefit of higher interest coupons on floating-rate CLOs. In the case of ABS, shorter maturities and principal amortizations allow investors to reinvest proceeds at higher yields if rates were to rise over an extended period. To complement the short duration of ABS in the barbell strategy, we prefer select, longer-dated, taxable municipal bonds that offer yield premium to Treasuries and agency debt. The political uncertainty over the past several years, namely the debt ceiling debate and the Fiscal Cliff, has created attractive valuations in the municipal market. As investors begin focusing on the real economy and not the political economy, we believe municipals are primed to benefit. According to the Rockefeller Institute, state tax revenues have grown for 10 consecutive quarters as employment at the state and local government level has stabilized. California, once the poster child for fiscal ineptitude, is projecting an $850 million budget surplus for full year 2014. A longer-term tailwind for municipal credit fundamentals will be the continued

momentum of the housing sector. Home price appreciation will eventually translate into higher property tax assessments realized by local governments over the next several years. Aside from these improving fundamental factors, the municipal sector may also benefit from technical catalysts. Building upon the record $50 billion in mutual fund inflows in 2012, continued demand for municipals will likely be aided by the expected growth of the U.S. economy throughout 2013. Increased Federal revenues may lead to a decline in Treasury bond issuance, forcing investors into other government-related alternatives such as municipals and military housing. Our focus remains on A-rated revenue bonds maturing within 20 years that finance essential services, public universities and transportation. Active Management in Practice With nominal coupons across the fixed-income universe near historical lows, the opportunity cost from employing a benchmark-driven, passively managed strategy has increased dramatically. An actively managed strategy provides the opportunity to generate returns through targeted weightings to attractively valued sectors. The volatility of sector performance over the past few years, quantified in the following table, underscores the importance of active management.

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The Future of Core Fixed-Income The traditional view of core fixed-income did not include active duration management, increased tolerance for tracking error, or significant allocations to non-indexed sectors such as floating-rate CLOs and off-the-run ABS. As the chasm between investors return targets and current market yields deepens, it is apparent that the traditional view of core fixed-income management requires innovation. The historically low-rate environment has intensified

the demand for absolute yield, antiquating investors historical focus on relative performance. In pursuing yield targets, investors must not allow short-term pursuits to derail long-term investment objectives. We believe the global easing cycle will continue to support a benign credit environment over the next two to three years; however, the current accommodative conditions are likely masking a comprehensive appreciation of investment risks.

Asset Allocation Matters, Particularly in Todays Low Yield Environment Historical Annual Fixed-Income Sector Returns
2006
High Yield

2007
Treasuries

2008
Treasuries

2009
High Yield

2010
High Yield

2011
Municipals

2012
High Yield

11.8 7.3

9.0 7.6

13.7 7.0

58.2 44.9
ABS

15.1

18.1 9.8

15.8%
IG Corporates

Leveraged Loans

Municipals

Municipals

Leveraged Loans

Leveraged Loans

10.0

Treasuries

9.8% 9.6 % 9.4% 3.7%


ABS

4.7%
IG Corporates

ABS

IG Corporates

4.6 % 2.2 1.9


ABS

IG Corporates

-4.9%
ABS

24.7%
IG Corporates

IG Corporates

9.0 % 7.2
%

IG Corporates

8.1% 5.1
ABS

Municipals

4.3

-12.7

18.7 0.7

Municipals

Leveraged Loans

Municipals

3.2

Leveraged Loans

-26.2

High Yield

Municipals

Treasuries

5.9

High Yield

5.0

Treasuries

3.1%

High Yield

1.9%

Leveraged Loans

-28.8%

Treasuries

-3.6 %

5.9%

ABS

Leveraged Loans

1.8%

Treasuries

2.0 %

With nominal yields near historical lows, price performance is likely to become a larger component of total returns in the near term. Active asset allocation provides the opportunity for a portfolio to generate returns through increased weightings to attractively valued sectors and decreased weightings to overvalued asset classes. Source: Barclays, Credit Suisse. Data as of 12/31/2012.

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The Changing of the Guard The Future of Core Fixed-Income Management


Traditional View: Barclays Agg
WEIGHT YIELD

U.S. Treasuries Agency MBS Agency Bonds Corporates RMBS n/a CMBS Taxable Municipals ABS Weighted-Average Yield 0%

0.9% 2.2% 1.3% 2.7% 1.7% 3.2% 0.9% 1.7% 1% 2% 3% 4% 5%

U.S. Treasuries Agency MBS Agency Bonds Corporates RMBS CMBS Taxable Municipals ABS Weighted-Average Yield 0%

1.0%

gov.-related debt

74.7%

1%

Future View: Guggenheim Core Fixed-Income


U.S. Treasuries WEIGHT Agency MBS Agency Bonds U.S. Treasuries Corporates Agency MBS RMBS Agency Bonds n/a CMBS Corporates Taxable Municipals n/a RMBS ABS CMBS Weighted-Average Yield Taxable Municipals ABS 0% Weighted-Average Yield 0% 1% 0.9% 1.7% 1.7% 1% 0.9% 2% 1.7% 2% 3% 4% 5% 3% 3.2% 4% 5% 1.3% 1.7% 2.7% 3.2% 0.9%1.3% 0.9% 2.2% 2.2% 2.7% debt gov.-related U.S. YIELD Treasuries Agency MBS Agency Bonds U.S. Treasuries Corporates Agency MBS RMBS Agency Bonds CMBS Corporates Taxable Municipals RMBS ABS CMBS Weighted-Average Yield Taxable Municipals ABS 0% Weighted-Average Yield 0% 1% 2% 3% 4% 1% 2% 3% 4% 1.0% 1.0% 2.3% 2.3% 2.3% 2.3% 4.2% 5.0% 4.2% 4.7% 5.0% 4.8% 4.9% 4.7% 4.2% 4.8% 5% 4.9% 4.2% 5%

16.6%

2.2% 2.7%

With the traditional view of core fixed-income management quickly becoming antiquated in todays U.S. Treasuries 1.0% low-yield environment, investors must begin looking forward towards the future of core fixed-income Agency MBS 2.3% management. Source: Barclays, Guggenheim Investments. Data as of 12/31/2012. Sector allocations are based on the representative
Agency Bonds Corporates
account of the Guggenheim Core Fixed-Income Strategy and excludes cash.

2.3%

4.2%

RMBS CMBS 3.2% Taxable Municipals ABS

5.0% 4.7% 4.8% 4.2% 4.9%

7%

7% 3% 4%

Given the overwhelming emphasis on total return, Weighted-Average Yield


5%investors

By remaining tightly aligned to the Barclays Agg, which 5% is currently bloated with low-yielding government-related debt, investors are giving up the flexibility to take advantage of undervalued sectors and underweight unattractive ones. In a market coping with unprecedented monetary conditions, we believe the surest path to underperformance is to remain anchored to outdated core fixed-income conventions of the past.

must be vigilant 1% identifying the risks in 2% 3% 4% 0%

involved in reaching for incremental yield, since not all yield is created equal. Employing investment shortcuts, such as increased credit or interest rate risk, solely to generate yield may come at the expense of future performance. Achieving yield targets without assuming undue risk has proven extremely difficult under the traditional framework. We believe it is achievable under a broadened investment framework.
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About Guggenheim Partners


Guggenheim Partners is a privately held financial services firm that provides asset management, investment banking, and insurance solutions. At Guggenheim Partners, we combine innovative thinking and experienced advice to sophisticated clients. Our primary businesses include:
INVES TMENTS SECURITIES INSUR ANCE

Fixed Income Equities Alternatives Managed Account Platform Asset Allocation

Advisory Financing Sales and Trading Research

Life and Annuity Capital Solutions Wealth Protection

About Guggenheim Investments


Guggenheim Investments represents the investment management division of Guggenheim Partners, which consist of investment managers with approximately $143 billion in combined total assets.1 Collectively, Guggenheim Investments has a long, distinguished history of serving institutional investors, ultra-high-networth individuals, family offices, and financial intermediaries. Guggenheim Investments offers clients a wide range of differentiated capabilities built on a proven commitment to investment excellence. Guggenheim Investments has offices in Chicago, New York City, and Santa Monica, along with a global network of offices throughout the United States, Europe, and Asia.
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Assets Under Management(AUM) is as of 12.31.2012 and includes $10.71B of leverage. AUM includes assets from Security Investors, Guggenheim Partners Investment Management, LLC (GPIM, formerly known as Guggenheim Partners Asset Management, LLC; GPIM assets also include all assets from Guggenheim Investment Management, LLC which were transferred as of 06.30.2012), Guggenheim Funds Investment Advisors and its affiliated entities, and some business units including Guggenheim Real Estate, Guggenheim Aviation, GS GAMMA Advisors, Guggenheim Partners Europe, Transparent Value Advisors, and Guggenheim Partners India Management. Values from some funds are based upon prior periods.
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Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC (GP): GS GAMMA Advisors, LLC, Guggenheim Aviation, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Investment Management, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners India Management, Guggenheim Real Estate, LLC, Security Investors, LLC and Transparent Value Advisors, LLC. Guggenheim Partners Investment Management, LLC (GPIM) is a registered investment adviser and serves as the adviser to the Core Fixed Income Strategy. GPIM is included in the GIPS compliant firm, Guggenheim Investments Asset Management, and is also a part of Guggenheim Investments. This material is intended to inform you of services available through Guggenheim Investments affiliate businesses. This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The authors opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance of indices of asset classes does not represent actual returns or volatility of actual accounts or investment managers, and should not be viewed as indicative of future results. The benchmarks used are for purposes of comparison and should not be understood to mean that there will necessarily be a correlation between the portrayed returns herein and these benchmarks. Past performance is not indicative of comparable future results. Given the inherent volatility of the securities markets, it should not be assumed that investors will experience returns comparable to those shown here. Market and economic conditions may change in the future producing materially different results than those shown here. All investments have inherent risks. No representation or warranty is made to the sufficiency, relevance, importance, appropriateness, completeness, or comprehensiveness of the market data, information or summaries contained herein for any specific purpose. 2013 Guggenheim Partners LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners LLC.

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