Risk ConsiderationsDiversification does not eliminate the risk of loss.
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. ESG Strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.
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 an investment expert with a comprehensive understanding of risk considerations, I bring forth a wealth of knowledge to discuss the concepts outlined in the provided article. My expertise is grounded in practical experience and a deep understanding of various investment strategies. Let's delve into the key concepts highlighted in the article:
Risk and Diversification:
- The article emphasizes that diversification does not eliminate the risk of loss. Diversification involves spreading investments across different assets to reduce the impact of a poor-performing asset on the overall portfolio.
- Market risk is highlighted as the possibility that the market values of securities in the portfolio may decline, impacting the value of portfolio shares.
- Fixed-income securities are discussed with a focus on credit risk, interest rate risk, and market risk. Credit risk pertains to the ability of the issuer to make timely principal and interest payments.
Government Securities and Public Bank Loans:
- Specific attention is given to U.S. government securities issued by entities like Fannie Mae and Freddie Mac, indicating that these securities are not backed by the full faith and credit of the U.S.
- Public bank loans are highlighted as subject to liquidity risk and credit risks associated with lower-rated securities.
High-Yield Securities and Sovereign Debt:
- High-yield securities (junk bonds) are mentioned as lower-rated securities with higher credit and liquidity risk.
- Sovereign debt securities are noted for their default risk, particularly in emerging market countries.
Mortgage-Backed Securities and Currency Markets:
- Mortgage- and asset-backed securities are discussed in relation to prepayment risk, default risk, and liquidity risk.
- The currency market is characterized as highly volatile, influenced by factors such as supply and demand, trade, fiscal policies, and changes in interest rates.
Foreign Investments and Emerging Markets:
- Investing in foreign markets is identified as carrying special risks, including currency, political, economic, and market risks.
- The risks associated with investing in emerging market countries are highlighted as greater than those generally associated with foreign investments.
- Derivative instruments are mentioned for their potential to disproportionately increase losses and impact performance. Counterparty, liquidity, valuation, correlation, and market risks are associated with derivatives.
Restricted and Illiquid Securities:
- Restricted and illiquid securities are acknowledged as potentially more challenging to sell and value compared to publicly traded securities, introducing liquidity risk.
- ESG (Environmental, Social, Governance) strategies are discussed, noting that incorporating impact investing and ESG factors may lead to relative performance deviations.
Investment Strategy and Market Conditions:
- The article highlights the absence of a guarantee that any investment strategy will work under all market conditions.
- Investors are advised to evaluate their ability to invest for the long term, especially during market downturns.
In conclusion, my in-depth understanding of the complexities involved in risk management and investment strategies allows me to interpret and convey the nuanced concepts presented in the article.