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RETIREMENT PLAN INVESTOR

Use your plan ID (available on your account statement) to determine which employer-sponsored retirement plan website to use:

IF YOUR PLAN ID BEGINS WITH IRK, BRK, 1, 2 OR 754

Visit americanfunds.com/retire

IF YOUR PLAN ID BEGINS WITH 34 OR 135

Visit myretirement.americanfunds.com

PORTFOLIO CONSTRUCTION

Rethink income for client goals

PC trends

Is your approach to income flexible enough? The Capital Group Portfolio Consulting and Analytics team analyzed nearly 2,100 portfolios managed by financial professionals from January 1, 2021 to September 30, 2021 and observed the following traits in allocations.

The Capital Group Portfolio Consulting and Analytics team analyzed nearly 2,100 professionally managed portfolios from January 1, 2021 to September 30, 2021. Of those portfolios, the average fixed income correlation to equity was 41%, the average duration was 4.75 years and the average exposure to low dividend payers was 43%.

Too much high yield, too correlated?

Our analysis shows that fixed income allocations in many portfolios are highly correlated to equities. But not all core-plus strategies are built to achieve the same objectives. Consider, for example, a flexible strategy like American Funds Strategic Bond FundSM (SBF) that has historically shown low correlations to both equity and higher yielding sectors of the fixed income market. SBF has also shown lower correlations to equities than the Morningstar Intermediate Core Plus Category average. Low correlations like this can become even more crucial for investors during periods of market stress.

In the chart on the left, the grey bar shows a -0.02 three-year correlation between American Funds Strategic Bond Fund and the S&P 500 Index. The blue bar shows a 0.47 three-year correlation of the Morningstar Intermediate Core Plus Category average to the S&P 500. In the chart on the right, the grey bar shows a -0.03 correlation of SBF to the S&P 500 Index, the aquamarine bar shows an 0.05 correlation to the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index, the lighter blue bar shows an 0.53 correlation to the Bloomberg U.S. Credit Index and the dark blue bar shows an 0.75 correlation to the Bloomberg U.S. Treasury Index. Correlations in the chart on the right are from March 31, 2016 through September 30, 2021. American Funds Strategic Bond Fund inception is 3/18/16. Correlation is a statistical measure of how a security and an index move in relation to each other.  A correlation ranges from -1 to 1.  A positive correlation close to 1 implies that as one moves, either up or down, the other will move in “lockstep” in the same direction.  A negative correlation close to -1 indicates the two have moved in the opposite direction.

Sources: Bloomberg Index Services Limited, Morningstar as of 9/30/21. American Funds Strategic Bond Fund inception is 3/18/16. Correlation is a statistical measure of how a security and an index move in relation to each other. A correlation ranges from –1 to 1. A positive correlation close to 1 implies that as one moves, either up or down, the other will move in “lockstep” in the same direction. A negative correlation close to –1 indicates the two have moved in the opposite direction.


The Capital Group Portfolio Consulting and Analytics team analyzed 1,237 fixed income portfolios from January 1, 2021 through September 30, 2021 for spread sectors. Of those portfolios, 47% of fixed income allocations were in spread sectors that seek higher income and returns. Fifty percent of those spread sector allocations were in core plus strategies.

*Of the 1,237 fixed income portfolios analyzed for spread categories by the Portfolio Consulting and Analytics team from 1/1/2021 to 9/30/2021, 47% was allocated to spread categories.

How do your core plus allocations compare? 

Quote Icons

“For an investor seeking retirement income, the challenge in the current environment is balancing the need for natural income, while remaining vigilant to downside risk. We remain focused on the role of fixed income within retirement income model portfolios to provide capital preservation, equity diversification and opportunistic exposure to higher-yielding assets, while being mindful of inflation protection.”

—MARIO DIVITO
Investment director

Equity focus on sustainable dividend growers

Many portfolios have limited exposure to high-dividend-paying companies. Our growth & income and retirement income models allocate to dividend-focused funds such as Washington Mutual Investors FundSM or Capital Income Builder®, based on model-specific goals. Investment selection in these funds may reflect a wide range of variables beyond topline dividend exposure, such as the potential for dividend sustainability (5-year dividend growth) and 5-year downside capture* as well as extensive bottom-up research.

Many professionally managed portfolios are dominated by low dividend payers

The chart illustrates that many professionally managed portfolios are dominated by low dividend payers. This chart shows how the average professionally managed portfolio is allocated to low, medium and high dividend payers. Low dividend payers offer dividends of 0.7% or less, medium offer dividends between 0.7% and 2.7% and high dividend payers offer dividends greater than 2.7%. This chart shows that the average professionally managed portfolio allocated 43% to low dividend payers versus American Funds Moderate Growth and Income (MGI) model, which allocated 25% and the American Funds Retirement Income - Moderate (RIM) model, which allocated 10% as of September 30, 2021. As of the same date, the average portfolio allocated 37% to medium dividend payers versus 46% for MGI and 41% for RIM. The average portfolio allocated 20% to high dividend payers, versus 30% for MGI and 49% for RIM.

*Downside capture is the ratio of a portfolio’s return during periods when the index or index blend was down, divided by the return of the index or index blend during those periods. For example, during periods when the index or index blend was down, a down capture ratio greater than 100 indicates the portfolio produced a lower return than the index blend.
Sources: Bloomberg Index Services Limited, Morningstar as of 9/30/21.

E8A99664-C66E-4E4E-ABEE-5921C5F92E63 Created with sketchtool.

What this means

Find the right dividend complexion to pursue your goals, such as income, downside protection and/or sufficient growth to meet long-term withdrawal needs. Consider flexible bond funds that can offer sector diversification, low equity correlations and a flexible approach to managing duration, rates and inflation.

Retirement Income models

Balance dividend income and flexible bond funds for different income goals

Challenge

Build models to account for the complex nature of the income distribution phase. This is a different challenge than accumulation or income generation alone; it requires managing multiple goals and risks at the same time.

Solution

We don’t aim for the highest possible yield in our retirement income models, as some competitor funds do, incurring the potential risk of greater volatility. Our retirement income models:

  • Take a holistic approach to diversifying income across bond sectors and equity via companies with a history of paying dividends.
  • Focus on capital preservation.
  • Use fixed income to provide a balance of capital preservation, equity diversification, income and inflation protection. This includes exposures to flexible bond funds such as American Funds Strategic Bond Fund and/or American Funds Multi-Sector Income Fund as of September 30, 2021.

“Beyond rescaling equity and fixed income weights, few advisors fine-tune their exposures to address unique needs for retirement income portfolios.”

—MARK BARILE
Manager of the Portfolio Consulting and Analytics team

Figures shown are past results for Class F-2 shares and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. View underlying fund allocations and returns for American Funds Retirement Income Model Portfolio-Moderate at https://www.capitalgroup.com/advisor/investments/model/RIM-F2.htm

What’s your goal?

Attributes of average allocations versus American Funds® Retirement Income Model Portfolio — Moderate

We encourage financial professionals to consider a range of model-specific measures, such as maximum drawdown, for sustained retirement income, along with attributes like inflation protection when needed.

Average professionally managed portfolio (fixed income sleeve)1 American Funds Retirement Income Model Portfolio — Moderate (fixed income sleeve)2
DURATION3 4.75 years 5.47 years
EXCESS YIELD OVER AGGREGATE4 109 basis points 53 basis points
MAXIMUM DRAWDOWN5 -5.48% -2.46%
TIPS EXPOSURE 3.49% 24%

Sources: Capital Group, FactSet, and Morningstar. Totals may not reconcile due to rounding.
1The average advisor portfolio represents 2,088 portfolios analyzed by Capital Group’s Portfolio Consulting and Analytics team from 1/1/2021 through 9/30/21.
2Portfolios are managed, so holdings will change. Visit capitalgroup.com for current allocations. The American Funds Retirement Income Model Portfolio — Moderate (fixed income sleeve) represents positioning as of 9/30/21.
3Average duration compared against the Bloomberg U.S. Aggregate Index.
4Excess yield represents 12-month yield of the fixed income sleeves of the average advisor portfolio and model portfolios, respectively, minus the 12-month yield of an ETF vehicle that tracks the Bloomberg Aggregate Index and is net of fees. Yield shown is the 12-month distribution yield. Twelve-month yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. Excess yield for the model is based on a weighted average of the 12-month distribution yields for each underlying fixed income fund in the model.
5Maximum drawdown is a measure of downside risk over any given time period; it is the maximum loss from the highest point to lowest point of portfolio returns before a new high point is reached. Drawdown since common inception of underlying funds as of March 2019. Based on actual model returns.

Are your portfolios built for sustainable income?

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Portfolio Construction Concepts

The Capital Group Portfolio Consulting and Analytics team analyzed 2,088 portfolios in consultation with financial professionals from January 1, 2021 to September 30, 2021. Of those 2,088 portfolios, the average fixed income sleeve correlation with equities (proxied by the S&P 500) was 41%, the average portfolio duration was 4.75 years and the average exposure to low dividend payers was 43%. Low dividend payers are defined as equities with a dividend yield less than 0.7%.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. For an investment offered through a group annuity, some of this information may differ and can be obtained from a financial professional.

Portfolios are managed, so holdings will change. Certain fixed income and/or cash and equivalents holdings may be held through mutual funds managed by the investment adviser or its affiliates that are not offered to the public.

Investments in mortgage-related securities involve additional risks, such as prepayment risk. The use of derivatives involves a variety of risks, which may be different from, or greater than, the risks associated with investing in traditional securities, such as stocks and bonds. Fund shares of U.S. Government Securities Fund are not guaranteed by the U.S. government. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds. The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. While not directly correlated to changes in interest rates, the values of inflation-linked bonds generally fluctuate in response to changes in real interest rates and may experience greater losses than other debt securities with similar durations. American Funds Strategic Bond Fund may engage in frequent and active trading of its portfolio securities, which may involve correspondingly greater transaction costs, adversely affecting the fund's results. Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility. These risks may be heightened in connection with investments in developing countries.

There may have been periods when the results lagged the index(es). The indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index. Index/Index blends for American Funds Model Portfolios are those that the Portfolio Solutions Committee believes most closely approximate the investment universe of a given model portfolio and do not specifically represent the benchmarks of the underlying funds in the American Funds model portfolio. Index blends are rebalanced monthly.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.

The Standard & Poor’s 500 Index is a market capitalization-weighted index based on the average weighted results of approximately 500 widely held common stocks. The S&P Index (“Index”) shown is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2021 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part is prohibited without written permission of S&P Dow Jones Indices LLC.

The Bloomberg U.S. Aggregate Index represents the U.S. investment-grade fixed-rate bond market. The Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index covers the universe of fixed-rate, non-investment-grade debt. The index limits the maximum exposure of any one issuer to 2%. The Bloomberg U.S. Credit Index is a market-value weighted index that tracks the total return results of publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-registered and must be an investment grade security. The Bloomberg U.S. Treasury Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index. These indices are unmanaged, and their results include reinvested distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively "Bloomberg"). Bloomberg or Bloomberg's licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg's licensors approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

© 2021 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.

Model portfolios are provided to financial intermediaries who may or may not recommend them to clients. These portfolios consist of an allocation of funds for investors to consider and are not intended to be investment recommendations. The portfolios are asset allocations designed for individuals with different time horizons, investment objectives, and risk profiles. Allocations may change and may not achieve investment objectives. If a cash allocation is not reflected in a model, the intermediary may choose to add one. Capital Group does not have investment discretion or authority over investment allocations in client accounts. Investors should talk to their financial professional for information on other investment alternatives that may be available. In making investment decisions, investors should consider their other assets, income, and investments. Visit capitalgroup.com for current allocations.

Model results reflect changes, if any, in the underlying fund over the model’s lifetime. Underlying funds may have been added or removed during a model's lifetime. Allocations are rebalanced monthly. Rebalancing approaches may differ depending on where the account is held. See capitalgroup.com/ for historical underlying fund allocations.

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This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

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