Bar chart showing yield for the following assets as of December 31, 2023, with the exception of Direct Lending, which is as of September 30, 2023. Global convertible bonds: 0.9%, U.S. equity: 1.4%, International equity: 3%, Global public real estate: 4.1%, Global infrastructure: 4.3%, U.S. investment grade: 4.5%, Securitized assets: 4.7%, Emerging market high yield: 7.2%, U.S. high yield: 7.6%, Leveraged loans: 9.4%, BDC: 10.5%, Direct Lending: 11.8%
Risks
Risk considerations
Alternative investments, such as private equity funds, are not appropriate for all investors and are only open to “accredited” or “qualified” investors within the meaning of the U.S. securities laws. They are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. Private equity funds use complex trading strategies, including hedging and leveraging through derivatives and short selling. These funds often demand long holding periods to allow for a turnaround and exit strategy. Private equity investing involves other material risks including capital loss and the loss of the entire amount invested.
Definitions
Index definitions
Bloomberg Global Convertibles Index blends the three regional Bloomberg Convertibles indexes – the U.S. Convertibles Index, the MEA Convertibles Index, and the APAC Convertibles Index – into a single global benchmark for the convertible asset class. The Global Convertibles Index is rules-based with an objective and transparent set of criteria used for index membership determination and rebalancing.Bloomberg U.S. Aggregate Bond Index is composed of the Bloomberg U.S. Government/Credit Index and the Bloomberg U.S. Mortgage-Backed Securities Index and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities.
Bloomberg U.S. Corporate High Yield Bond Index covers the U.S.-dollar-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB= or below. Included issues must have at least one year until final maturity.
Bloomberg U.S. Securitized: MBS/ABS/CMBS racks agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC); investment grade debt asset backed securities; and investment grade commercial mortgage backed securities.
Cliffwater BDC Index measures the performance of lending-oriented, exchange-traded Business Development Companies (BDCs), subject to certain eligibility criteria regarding portfolio composition, market capitalization, and dividend history. The CWBDC is a capitalization-weighted index that is calculated on a daily basis using publicly-available closing share prices and reported dividend payouts.
Cliffwater Direct Lending Index seeks to measure the unlevered, gross of fee performance of U.S. middle market corporate loans, as represented by the asset-weighted performance of the underlying assets of Business Development Companies (BDCs), including both exchange-traded and unlisted BDCs, subject to certain eligibility requirements.
FTSE NAREIT Equity REITS Index is a broad-based index consisting of real estate investment trusts (REITs). This excludes any equity REITS that are designated as Timber REITS.
J.P. Morgan EMBI Global Index (USD) is a U.S.-dollar-denominated, investible, market-cap-weighted index representing a broad universe of emerging market sovereign and quasi-sovereign debt. While products in the asset class have become more diverse, focusing on both local currency and corporate issuance, there is currently no widely accepted aggregate index reflecting the broader opportunity set available, although the asset class is evolving. By using the same index provider as the one used in the developed market bonds asset class, there is consistent categorization of countries among developed international bonds (ex-U.S.) and emerging market bonds.
MSCI World Infrastructure is a free float-adjusted market cap weighted index. Its members are infrastructure owners and operators who tend to demonstrate highly inelastic demand patterns, stable, predictable returns and inflation-linked pricing power. Includes companies in the telecom, utilities, energy, transportation and social infra sectors.
MSCI All Country World ex USA Index is a free-float weighted equity index that is designed to measure the equity market performance of 22 developed and 23 emerging markets.
MSCI USA Index is a free-float‐adjusted market-capitalization-weighted index that is designed to measure the equity market performance of the United States.
The S&P/LSTA U.S. Leveraged Loan 100 Index is designed to reflect the performance of the largest facilities in the leveraged loan market.
Note: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
Sources: Bloomberg, Cliffwater, Morgan Stanley Capital International (MSCI), and Wells Fargo Investment Institute, as of December 31, 2023. Direct lending yield is as of September 30, 2023. For illustrative purposes only. BDC = Business Development Companies. Direct lending: Cliffwater Direct Lending Index; BDC: Cliffwater BDC Index; Emerging market high yield: Bloomberg Emerging Markets High Yield; U.S. high yield: Bloomberg U.S. Corporate High Yield; Leveraged loans: S&P/LSTA U.S. Leveraged Loan 100 Index; Global infrastructure: MSCI World Infrastructure Index; Global public real estate: FTSE NAREIT Equity REITs Index; International equity: MSCI All Country World ex-U.S. Index; Securitized assets: Bloomberg U.S. Securitized: MBS/ABS/CMBS; U.S investment grade: Bloomberg U.S. Aggregate Bond Index; U.S. equity: MSCI USA Index; Global convertible bonds: Bloomberg Global Convertibles Composite Index. Yields represent past performance and fluctuate with market conditions. Current yields may be higher or lower than those quoted above. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. See the “Index Definitions and Asset Class Risk Disclosures” link above for index definitions.
Investing in stocks involves risk and their returns and risk levels can vary depending on prevailing market and economic conditions. Foreign investing has additional risks including currency, transaction, volatility and political and regulatory uncertainty. These risks are heightened in emerging markets. Bonds are subject to interest rate, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. REITS have special risks, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions. Business Development Companies (BDC) involve economic, credit and liquidity risks in addition to the special risks associated with investing in a portfolio of small and developing or financially trouble businesses.
Key Takeaways
- Alternative investments can be a source of income for investors seeking to diversify their fixed income portfolios.
- Yields are attractive for Direct Lending strategies and business development companies (BDCs).