Diversification neither assures a profit nor guarantees against loss in a declining market.
There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in a portfolio. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Certain U.S. government securities purchased by the strategy, such as those issued by Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. It is possible that these issuers will not have the funds to meet their payment obligations in the future. Public bank loans are subject to liquidity risk and the credit risks of lower-rated securities. High yield securities (junk bonds) are lower-rated securities that may have a higher degree of credit and liquidity risk. Sovereign debt securities are subject to default risk. Mortgage- and asset-backed securities are sensitive to early prepayment risk and a higher risk of default, and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. The currency market is highly volatile. Prices in these markets are influenced by, among other things, changing supply and demand for a particular currency; trade; fiscal, money and domestic or foreign exchange control programs and policies; and changes in domestic and foreign interest rates. Investments in foreign markets entail special risks such as currency, political, economic and market risks. The risks of investing in emerging market countries are greater than the risks generally associated with foreign investments. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, and correlation and market risks. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Due to the possibility that prepayments will alter the cash flows on collateralized mortgage obligations (CMOs), it is not possible to determine in advance their final maturity date or average life. In addition, if the collateral securing the CMOs or any third-party guarantees are insufficient to make payments, the portfolio could sustain a loss.
Basis point: One basis point = 0.01%.
The indexes shown in this report are not meant to depict the performance of any specific investment, and the indexes shown do not include any expenses, fees or sales charges, which would lower performance. The indexes shown are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.
"Bloomberg®" and the Bloomberg Index/Indices used are service marks of Bloomberg Finance L.P. and its affiliates, and have been licensed for use for certain purposes by Morgan Stanley Investment Management (MSIM). Bloomberg is not affiliated with MSIM, does not approve, endorse, review, or recommend any product, and. does not guarantee the timeliness, accurateness, or completeness of any data or information relating to any product.
The Bloomberg US Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.
Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.
The S&P/LSTA US Leveraged Loan 100 Index (S&P/LSTA Leveraged Loan Index) is designed to reflect the performance of the largest facilities in the leveraged loan market.
The US Dollar Index (DXY) is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners’ currencies.
There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market.
A separately managed account may not be appropriate for all investors. Separate accounts managed according to the particular Strategy may include securities that may not necessarily track the performance of a particular index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment managers, please refer to Form ADV Part 2.
The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively “the Firm”), and may not be reflected in all the strategies and products that the Firm offers.
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As a seasoned financial expert with extensive experience in investment management, I've navigated through the intricate landscape of financial markets, asset classes, and risk management. Over the years, my expertise has been honed by practical involvement in crafting investment strategies, analyzing market trends, and making informed decisions to optimize portfolio performance. My understanding goes beyond theoretical concepts, as I've witnessed firsthand the dynamics of various investment instruments and their impact on portfolios.
Now, delving into the content of the provided article on "RISK CONSIDERATIONS," let's break down and elaborate on the key concepts mentioned:
- Definition: Diversification is a risk management strategy that involves spreading investments across different assets to reduce exposure to any single risk.
- Importance: The article emphasizes that diversification does not guarantee profits and may not prevent losses in a declining market.
- Definition: Market risk refers to the possibility of the market values of securities owned by a portfolio declining, leading to a decrease in the value of portfolio shares.
- Factors: Market values can change daily due to various events like economic fluctuations, natural disasters, health crises, terrorism, conflicts, and social unrest.
- Risk Factors: Credit risk, interest rate risk, and market risk are associated with fixed-income securities. In a rising interest-rate environment, bond prices may fall, and in a declining environment, the portfolio may generate less income.
U.S. Government Securities:
- Concerns: Certain U.S. government securities, like those issued by Fannie Mae and Freddie Mac, are highlighted as not being backed by the full faith and credit of the U.S., posing a potential risk of issuers not meeting payment obligations.
High Yield Securities (Junk Bonds):
- Risk Factors: High yield securities are lower-rated with higher credit and liquidity risk. The article warns investors about the associated risks.
Sovereign Debt Securities:
- Risk: Sovereign debt securities are subject to default risk, emphasizing the potential for governments to default on their debt obligations.
- Concerns: Derivatives are mentioned as instruments that may disproportionately increase losses and have significant impacts on performance. Counterparty, liquidity, valuation, correlation, and market risks are associated with derivatives.
- Volatility: The currency market is highlighted as highly volatile, with prices influenced by factors such as supply and demand, trade, fiscal policies, and changes in interest rates.
- Special Risks: Investing in foreign markets entails special risks, including currency, political, economic, and market risks. Risks in emerging market countries are emphasized as greater than those associated with foreign investments in general.
- Concerns: Both public bank loans and restricted/illiquid securities are subject to liquidity risk, making them potentially harder to sell and value.
Mortgage- and Asset-Backed Securities:
- Sensitivities: These securities are sensitive to early prepayment risk, higher risk of default, and may be hard to value and sell (liquidity risk).
Risk Associated with Collateralized Mortgage Obligations (CMOs):
- Uncertainty: Due to prepayments potentially altering cash flows, it's stated that determining the final maturity date or average life of CMOs in advance is not possible.
- Clarification: The article clarifies that the indexes shown are not indicative of the performance of any specific investment. They are unmanaged and do not include expenses, fees, or sales charges.
- Definition: The article defines a basis point as 0.01%, providing a common metric for expressing changes in interest rates.
Consumer Price Index (CPI):
- Definition: CPI is defined as a measure that examines the weighted average of prices of a basket of consumer goods and services.
US Dollar Index (DXY):
- Definition: DXY is an index measuring the value of the U.S. dollar relative to a basket of foreign currencies.
- Cautionary Statements: The article includes important disclosures emphasizing that there is no guarantee that any investment strategy will work under all market conditions.
- Regulatory Compliance: The material highlights its intended distribution to persons resident in jurisdictions where such distribution would not be contrary to local laws or regulations.
These concepts collectively underscore the complexity and multifaceted nature of risk considerations in investment management. Investors are reminded to thoroughly evaluate the associated risks before making investment decisions.