Fear of rates rising and causing a large price depreciation in fixed income funds continues to be a very concerning topic. Our previous article ‘Rising Rates: How are you prepared?’ addressed some of the diversification techniques and how greatly varying the correlation can be between different fixed income asset classes. This recent flyer from Franklin Templeton, ‘Interest Rates and Your Fixed Income Investments’ , addressed an additional component: the role income plays in a fund’s total return.
A fixed income fund generates return in two main ways: price appreciation and income from the underlying holdings. Just because the underlying holdings depreciate, does not mean the fund will necessarily have a negative total return after factoring in the income generated. The flyer does a great job of visually displaying this concept in a year by year analysis of Barclays U.S. Aggregate Index’s total return broken up by price appreciation/depreciation and income. Furthermore, it looks at the total return for Government, Municipal, and Corporate Bonds over the last 20 years (ending December 31, 2012) and shows this same breakdown – over 90% of the total return is income derived!