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Core Plus is a portfolio management strategy that combines low-risk investment grade bonds with high-risk instruments to reduce costs, volatility, and taxes while maximizing returns. The major holdings track major market indices, while the remaining 20-25% is allocated to actively managed short-term instruments. Credit rating is a key component of resource allocation within a Core Plus portfolio.
Core Plus refers to a portfolio management strategy that employs a combination of relatively low-risk, passively managed investment grade bonds with individually selected high-risk instruments. The rationale behind this strategy is to reduce costs, volatility, and taxes while maximizing portfolio returns. In the Core Plus portfolio, the major holdings, comprising approximately 75 to 80 percent of the portfolio, track major market indices such as the Lehman Aggregate Bond Index or the Standard and Poor’s 500 Index. Investors in Core funds Plus hold these investments for the long term, with the intention of offsetting the average return produced by the given market for the instrument. Investors allocate the remaining 20 to 25 percent of the portfolio to actively managed short-term instruments, with the opportunity for a qualified portfolio manager to outperform the market and improve returns.
The core holdings of the Core Plus Portfolio consist of traditional fixed income or fixed income securities, such as passive mutual funds, index funds or exchange traded funds. Passively managed assets trade assets only when underlying benchmarks change, which means fewer trades with lower load fees and lower capital gains taxes. Administrative fees are also low, compared to active administrative fees, because the manager makes decisions only when index changes occur. A core mutual fund maintains a mix of small-cap and large-cap funds that provide diversification across a variety of markets and together reflect a growth investing approach.
Periodically, market inefficiencies resulting from economic uncertainty provide opportunities for short-term investment in high-risk, undervalued securities, such as investment real estate or a commodity option contract. The Core Plus Portfolio can allocate up to 25 percent of its value to these types of investments. Projecting the risk and return of a given stock, bond or fund is a vital part of this process. Managers must take into account the various risk factors of a given investment, including credit rating, interest rates, liquidity, leverage, and currency risks. They must also weigh the ratio of expenses against performance, as actual performance can be dismal once expenses are subtracted from an actively traded security.
Credit rating is a key component of resource allocation within a Core Plus portfolio. Securities tracked in the Lehman Aggregate Bond Index are primarily equity-based, and funds that use this index as a benchmark will be rated AAA, the highest credit rating. Junk bonds, while providing higher returns, increase the volatility of the fund. Foreign currency exposure, found with foreign currency denominated bonds, also adds volatility and risk.
Smart Asset.
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