Because bonds behave independently from equities, adding fixed income investments to a portfolio can improve its overall diversification. Fixed income securities expand the opportunity of investors to participate in the performance of capital markets and provide a more reliable source of income than other asset classes.
Relative performance in fixed income is largely driven by two dimensions: bond maturity and credit quality. Bonds that mature farther in the future are subject to the risk of unexpected changes in interest rates. Bonds with lower credit quality are subject to the risk of default. Extending bond maturities and reducing credit quality increases potential returns.
Since it is impossible to predict what will happen with interest rates in the future, we diversify broadly and use a "variable maturity" approach in most of our portfolios. This approach, which was developed by Professor Eugene Fama, uses the current yield curve to determine optimal maturities and holding periods. To maximize expected returns, we choose shorter maturities in flat or inverted yield curve environments and longer maturities in upwardly sloped curves. Maturities are shifted in response to changes in the current yield curve.
Dimensional follows several different strategies in its fixed income portfolios, each designed to meet specific investor goals.
Investing in global bonds can increase diversification. The use of non-dollar developed market bonds, however, introduces foreign currency exposure. Currency exposure tends to increase the volatility of an international fixed income portfolio. To reduce this volatility, we hedge currency exposure in three of our global bond portfolios. This enables us to gain the benefits that come from diversifying across many countries without measurably increasing currency risk.
Expected returns across hedged bonds differ because the shape of each yield curve is different. Portfolio maturities and country weightings follow a variable approach based on the expected return matrix generated for each eligible country and can be tilted toward countries with higher expected returns.
For fixed income investors seeking the higher return potential presented by unhedged foreign bonds, Dimensional offers the Selectively Hedged Global Fixed Income Portfolio. Depending on an investor's risk tolerance and asset allocation, introducing additional currency exposure may do little to alter the volatility of the overall portfolio.
PRINCIPAL RISKS (fixed income)
The principal risks of investing in these portfolios may include any of the following: market risk, foreign securities and currencies risk, interest rate risk, inflation-protected securities interest rate risk, credit risk, risk of banking concentration, risk of investing for inflation protection, income risk, call risk, tax liability risk, state-specific risk, and non-diversification risk. These risks are fully described in the prospectus in the section entitled "Principal Risks."
The following information for the Dimensional Short-Term Investment Fund is provided to satisfy the requirements of Rule 2a-7 under the Investment Company Act of 1940.
Effective January 31, 2011, the Fund's Form N-MFP filings will be made publicly available via the SEC website and can be obtained by clicking the following link: www.sec.gov.
Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at this link.
Investing involves risks such as fluctuating value and possible loss of principal investment.