Core Plus Investment Management – Definition and Guide

What Is a Core Plus Investment Strategy?

Core PlusCore holdings are the central investments of a long-term portfolio. Core plus is an investment management style that permits managers to augment core base holdings.  Within a specified-objective portfolio, managers can add instruments that have a greater risk, but greater potential return. Funds that utilize this strategy are called Core Plus Funds.

Core plus is an investment management style.  It permits managers to augment a core base of holdings with instruments that offer greater risk but greater potential return.  Core plus investment strategies are primarily associated with fixed income funds.  Equity funds can also use these strategies.  They seek to maximize total return, minimize risk, and preserve capital.  They also seek to utilize all sectors of the fixed income market. Core Plus portfolios are well diversified.  They consist of high-quality investment grade, high yield, and non-dollar securities.  The average portfolio duration is three to six years.

Core plus bond funds are typically associated with fixed-income instruments.  However, within their core portfolio bond holdings, they can add alternative investments.  These might include high-yield, global, and emerging market debt. Core plus equity funds also exist and follow a similar strategy.  They use alternative investments to enhance the return from a core market segment.

Understanding Core Plus Bond Funds

Bond funds are typically a boring component of many people’s portfolios.  But, high-quality bonds are a proven and effective, reliable diversifier for equity risk in a portfolio. It’s a comfort to know that when your stock funds are losing money, your high-quality bond funds are likely holding up well.  However, some investors prefer to be a little more daring with their bond allocation. That’s when core plus fixed-income strategies come into play.

Core plus fixed-income strategies invest in typical “safe haven” core bond fare, such as intermediate-term Treasury securities and high-quality corporates and mortgages. But core-plus strategies can take on a little more credit risk and/or interest-rate risk than more conservative peers. Core-plus strategies can also invest in more income-oriented or opportunistic fare such as nonagency MBS, lower-quality corporate bonds, or emerging-markets debt, which come with greater return potential but also court greater risk. (Source:morningstar)

Core Plus Fixed Income Strategy

Core plus investment strategies are primarily associated with fixed income funds. They give a fund manager some flexibility to enhance returns from investments beyond the core objective of a fund. The securities used for these extra returns are typically also fixed-income investments.  They are often riskier than the fund’s core holdings. But, they are potentially more rewarding as well.

Investment advisors in a core plus fund will build their primary assets specifically around securities that meet a specified objective. This portion of the portfolio is designed to be maintained as a long-term investment, with the intention of holding securities virtually forever. Such holdings might represent as much as 75% of the portfolio. The remaining balance would then consist of higher-risk holdings, which may have shorter investment horizons than the core components of the portfolio. As such, a portfolio’s core investments would represent a solid foundation to which more aggressive, diversified investments could be added. (Source:investopedia)

Core vs Core Plus Real Estate Investment

Core Real Estate Investment

‘Core’ is synonymous with ‘income’ in the stock market. Core property investors are conservative investors looking to generate stable income with very low risk. Core properties require very little hand-holding by their owners and are typically acquired and held as an alternative to bonds. This type of investing is as close as one can get to passive investing when buying properties directly. A core property requires very little asset management and is typically occupied with credit tenants on long-term leases.

Core Plus Real Estate Investment

Core Plus in real estate is synonymous with ‘growth and income’ in the stock market.  It is comparable with a low to moderate risk profile and a focus on higher returns.  Core plus property owners typically have the ability to increase cash flows.  They can do this through light property improvements, management efficiencies, or by increasing the quality of the tenants. Similar to core properties, these properties tend to be high-quality and well-occupied.

The potential downside of a core plus real estate investment is that the cash flow is less predictable than a core investment, and these properties require active participation by ownership. A 15-year-old apartment building that is well-occupied but in need of light upgrades is an example of a core plus investment opportunity. The property will produce ample cash flow but some of the cash will be used for future deferred maintenance such as roofs and parking lot repairs. (Source:origininvestments)

What are Core Plus Infrastructure Assets?

The infrastructure industry is evolving.  Over the past decade, increased market segmentation has emerged. This is a relatively young industry and segmentation is a new trend.  There are a variety of funds coming to the market.  These are specializing in transaction size, risk profile, geography, sub-sector, and infrastructure type. For example, there are numerous renewable power funds being marketed right now. A few years ago, that type of segmentation and focus was rare. Ten years ago in North America, there were no more than a few non-generalist managers from which to choose.  There is growing interest in the infrastructure asset class from institutions.  They are looking for stable and predictable cash flows, low volatility, and low correlation to other asset classes.

  • Young but growing – The infrastructure asset class remains young, but a number of credible managers have emerged that possess long-term investment records.
  • A wide variety of strategies – Infrastructure strategies vary widely on a risk vs return basis.  They range from stable, cash-generative operating assets to opportunistic investments with private equity-like returns.
  • Wide variety of structures – The structures used to invest in infrastructure vary.  They range from publicly traded funds to privately-held open- and closed-end structures.

Prior to investing in infrastructure, clear objectives for a program should be established. Desired objectives impact both the strategies pursued, and the investment structure utilized.

What is an Intermediate-Term Bond Fund?

Intermediate-term bond funds invest in bonds that offer investors a 5–10-year exposure. Mutual funds pool money from many investors and invest it with a specific goal or investment type in mind. They tend to be easier to buy than individual bonds because the fund managers do the research for you. The minimum amount needed to invest is also usually lower.

With a bond fund, you diversify your holdings, and you may be invested in a lot of different types of bonds—government, corporate investment-grade, corporate high-yield, municipals, and so on—which minimizes the risk of default wiping out all of your assets. Intermediate-term bond funds are no different and will provide you with diversification within that bond fund class. (Source:thebalance)

Intermediate-term core bond portfolios invest primarily in investment-grade U.S. fixed-income issues.  These include government, corporate, and securitized debt.  They usually hold less than 5% in below-investment-grade exposures. Their durations (a measure of interest-rate sensitivity) typically range between 75% and 125% of the three-year average of the effective duration of the Morningstar Core Bond Index.

Up Next: Deferred Revenue – Is Deferred Revenue Good or Bad?

Deferred revenue is also known as unearned revenue.  The term refers to advance payments a company receives for products or services.  These are to be delivered or performed in the future. The company that receives the prepayment records the amount as deferred revenue.  It is recorded as a liability on its balance sheet.

Even though it has the word revenue in it, unearned revenue is a liability.  This is because it represents the goods or services you owe to your customers. Just because money is in your bank account, it doesn’t mean your client won’t cancel or ask for a refund.  So, deferred revenue is a liability because it reflects revenue that has not been earned.  Therefore, it represents products or services that are still owed to a customer. As time passes, and the product or service is delivered, it is recognized proportionally as revenue on the income statement.

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