Traditionally, many investors have relied on the Bloomberg U.S. Aggregate Bond Index (U.S. Agg) as a proxy for their core bond allocation.

But sticking too closely to the U.S. Agg has historically proven to be suboptimal from a risk-return perspective. That’s why we believe investors should consider a multisector income fund for their core bond allocation.

The number one reason to consider a multisector fund for a core bond allocation is that multisector funds have historically generated better risk-adjusted and absolute returns than the U.S. Agg, core, and core-plus categories.¹

As shown in Exhibit 1, over the past five years, the multisector category has provided higher returns with lower volatility than the U.S. Agg, core bond, and core-plus categories.

This record of strong risk-adjusted performance may come as a bit of a surprise to investors, many of whom think of multisector funds as being “higher risk” than core and core-plus funds.

While it is true that over the long term multisector funds exhibit a higher level of volatility than core and core-plus categories, we think the more important takeaway is that the primary objective of multisector funds may not necessarily be to target a higher level of risk, but rather to target a more efficient mix of interest-rate and credit-spread risk.

As shown in Exhibit 2, the multisector category may have more flexibility to balance these risks under varying market conditions as it seeks to maximize the long-term return potential from fixed income securities.

The present trend of multisector funds outperforming core and core-plus strategies is not only a recent phenomenon. The multisector category has outperformed the core and core-plus categories on an excess return basis for all 10-year rolling periods over the past 10 years, as shown in Exhibit 3.

In our view, the outperformance speaks to the benefit of having diversified income streams and a better balance of credit-spread and interest-rate risk.

Some investors may be concerned that increasing risk within their fixed income allocation could reduce their bond allocation’s effectiveness in providing a ballast against equity volatility.

But we find that, within the confines of a 60/40 portfolio, using a multisector fund as a core bond allocation has resulted in marginal increases in volatility, while boosting total returns and Sharpe ratios, as shown in Exhibit 4.

Therefore, taking on a slightly higher and more even mix of risk within one’s bond allocation may be a more efficient way of building a balanced portfolio.

How do multisector funds differ from traditional core and core-plus funds? The primary distinction is that multisector portfolios typically offer exposure to a wider selection of fixed income sectors.

As shown in Exhibit 5, the U.S. Agg is overwhelmingly weighted in U.S. Treasuries (currently 45%), agency mortgage-backed securities (MBS), and investment-grade (IG) corporates. In contrast, typical multi-sector portfolios aim to provide exposure to a broad array of fixed income sectors, offering better diversification of risk exposures, borrowers, and sources of yield.

Thus far in 2025, investors have been voting with their dollars, as flows into multisector funds have far surpassed flows into other core and core-plus strategies. We believe this trend may point to multisector funds gaining recognition for their utility in building efficient portfolios suited to long-term investor goals.

In summary

In our view, it is essential for an entire portfolio to contribute to an investor’s long-term investment goals. We believe that, over the long term, multisector income funds may lead to better outcomes through their more diverse exposure and better balance of interest-rate and credit-spread risk.

IMPORTANT INFORMATION

Actively managed portfolios may fail to produce the intended results. No investment strategy can ensure a profit or eliminate the risk of loss.

Collateralized Loan Obligations (CLOs) are debt securities issued in different tranches, with varying degrees of risk, and backed by an underlying portfolio consisting primarily of below investment grade corporate loans. The return of principal is not guaranteed, and prices may decline if payments are not made timely or credit strength weakens. CLOs are subject to liquidity risk, interest rate risk, credit risk, call risk and the risk of default of the underlying assets.

Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.

Fixed income securities are subject to interest rate, inflation, credit and default risk.  The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa.  The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.

Mortgage-backed securities (MBS) may be more sensitive to interest rate changes. They are subject to extension risk, where borrowers extend the duration of their mortgages as interest rates rise, and prepayment risk, where borrowers pay off their mortgages earlier as interest rates fall. These risks may reduce returns.

Securitized products, such as mortgage-backed securities and asset-backed securities, are more sensitive to interest rate changes, have extension and prepayment risk, and are subject to more credit, valuation and liquidity risk than other fixed-income securities.