In today’s dynamic fixed income landscape, multi-sector funds are emerging as an attractive option for investors seeking higher income and total return potential with managed volatility. Multi-sector funds typically invest in different fixed income sectors as the nomenclature implies, but they generally have varying benchmarks and their own unique prospectus investment limits which allow for flexibility.
Why Multi-Sector Funds Stand Out
Many multi-sector funds offer a unique proposition by blending active attributes from the breadth of fixed income categories. Unlike traditional bond funds constrained by specific benchmarks, multi-sector funds tend to focus on specific goals and outcomes. Their key characteristics may include:
- True active management vs. “benchmark-hugging”.
- Flexible, outcome-oriented approach.
- Higher income and total return potential than index-based funds.
- Some focus on managing volatility.
Why Now? The Market Dynamics are Favorable
Current market conditions present a compelling case for multi-sector funds:
- Increased interest rate volatility – Favorable for active Treasury management.
- Tight credit spreads in Investment Grade and High-Yield sectors – Favorable for Credit management.
- Divergence between rate volatility and credit spreads – Favorable for those who can capitalize on opportunities between these characteristics.
The nearby chart shows the ICE BofA MOVE Index (measuring US bond market volatility) and the Bloomberg US Corporate High Yield Bond Index Average Option-Adjusted Spread (OAS) have recently diverged, creating opportunities:
There are many reasons for the recent divergence, but the main cause was the Federal Reserve’s September interest rate cut. However, the current situation doesn’t typically last long as these indices are correlated. Typically, either rates will rally and/or spreads will widen, if history is any guide. This is a perfect scenario for an actively managed multi-asset fund that has the flexibility and dynamic asset allocation process to invest in Treasuries and Credit, and across the spectrum of fixed income that are not as highly correlated to these indices, such as Preferred, Securitized and Bank Loan investments.
Conclusion
Multi-asset funds may present a timely opportunity for those investors seeking more income, but with the flexibility to pursue attractive total return opportunities across a wide swath of the credit markets. In doing so, the risk/reward trade-off for investors may be enhanced.
Important Disclosures & Definitions
Bloomberg US Corporate High Yield Bond Index: measures the USD-denominated, high yield, fixed-rate corporate bond market.
ICE BofA MOVE Index: tracks US fixed income market volatility with near-real-time pricing.
Investment Grade (IG): a rating that signifies that a municipal or corporate bond presents a relatively low risk of default. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody's. Anything below this 'BBB' rating is considered non-investment grade.
Option-Adjusted Spread (OAS): the spread measures the difference in the yields of two debt instruments with different characteristics such as maturities or credit ratings. "Option-adjusted" refers to inclusion of call provisions in the securities, shortening their maturities.
One may not invest directly in an index.
AAI000778 10/22/2025
