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Stress-Testing Some Vanguard and T. Rowe Allocation Funds

These medalists show it’s possible for longer-duration strategies to beat peers when rates rise.

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In the early throes of the recent global pandemic, the Federal Reserve lowered interest rates twice, resulting in a 0-0.25% federal-funds rate that hasn’t budged. But with coronavirus vaccinations in progress and the U.S. economy showing signs of recovery, many expect interest rates to rise, though few agree on when this will happen. Rising rates have a negative impact on strategies with long duration (a measure of interest-rate risk), and recent rising-rate anticipation has led many investors to take a closer look at the durations of their funds. But duration alone won’t make or break performance for thoughtfully curated allocation strategies. Other characteristics of the portfolio’s profile, such as the size of the equity sleeve relative to that of the bond sleeve, geographic and sector diversification, and tilts to lower credit risk, can offset the effects of a longer duration relative to peers. Let’s consider a few Morningstar Medalist allocation strategies during two recent stress periods for rates: August-December 2016 and January-October 2018.

  - Source: Morningstar.

  - Source: Morningstar.

Emory Zink does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.