PRUDENTIAL INVESTMENTS, A PGIM BUSINESS | MUTUAL FUNDS
PERSPECTIVES ON volatility
Three investment strategies
for volatile markets
Last year’s market volatility has given way to this year’s market uncertainty,
increasing the anxiety of many investors seeking growth and solid returns.
Tired of seeing red in their portfolios and with 2016 off to a rocky start, many
investors are wondering what they can do to help insulate their portfolios from
ongoing volatility. For some, cashing in their chips and moving to the sidelines
seems like the best option. Unfortunately, doing so can dramatically alter
investment results and the likelihood of achieving their stated financial goals
and objectives. So what do they do now?
TRY NOT TO WORRY—THIS, TOO, SHALL PASS
Stock market downturns are perfectly normal, even in the midst of a bull market.
Still, investors remain skittish because the pain of the 2007–2009 recession and
the corresponding bear market remain fresh in their minds. But we’ve experienced
volatile markets before, driven by a variety of different events and factors.
Growth of $10,000 since 1985
Stocks
Cash
Bonds
$254,466
227,500
$184,758
155,000
$86,620
82,500
10,000
1/85
$31,088
1/90
1/95
1/00
1/05
1/10
12/15
Late 1980s
1990s
2000s
2010–2015
Black Monday—
markets crash
Industrial production
and manufacturing
trade sales decrease
Collapse of the
dot.com bubble
Oil prices reach
historic lows
Savings and loan
scandals
Corporate accounting
scandals
China currency
devaluation
Global financial crisis
Fed rate hikes begin
Iran-Contra scandal
High unemployment
September 11th attacks Greek debt crisis
Source: As of 12/31/2015. Calculated by Prudential Investments LLC using data presented in Morningstar
software products. All rights reserved. Used with permission. Stocks are represented by the S&P 500 Index;
Bonds are represented by the Barclays U.S. Aggregate Bond Index; Cash is represented by the U.S. Treasury
T-Bill; 60-40 Portfolio reflects 60% stocks/40% bonds. This chart represents historical index performance and
does not assume the effects of sales charges. An investment cannot be made directly into a specific index.
Page 1 of 4
2.Look Beyond Traditional
Style Boxes
3.Mitigate Volatility and
seek Dependable Income
60–40 Portfolio
$300,000
1.Build Out From the Core
Perspectives ON volatility
It’s important to remember that volatile periods like today often present opportunities
for investors. Many investors and analysts look at market corrections as a necessary
evil to cool off an overheated stock or bond market. Broad market corrections can
often be a great time to add to positions in a portfolio at a lower price. Those who
stay invested during volatile markets generally come out ahead in the end.
CONSIDERING A PORTFOLIO CHANGE? HERE ARE three IDEAS
It’s natural to be concerned about your portfolio during periods of volatile markets,
and now might be an opportune time to make an adjustment. Here are some ideas
to consider with your financial professional to help cope with today’s volatility.
1. Build Out From the Core—Diversify Fixed Income. The role of fixed income
investments, in addition to providing income of course, is to help buffer volatility
from the equity side of your portfolio. So if today’s volatility is making you anxious,
you may want to consider increasing your fixed income allocation, increasing the
credit quality or the duration of your bond portfolio.
Fact: There have
been 22 corrections
in the U.S. markets
between 1946 and
2015 with an average
decline of 14%.
Consider: Prudential Short-Term Corporate Bond Fund, Inc.
—A well-diversified corporate bond fund that seeks to provide
yield, appreciation, and stability through different market cycles.
2. Look Beyond Traditional Style Boxes—Consider an Alternative. When markets
are volatile, it seems like every asset class is going down at the same time. One
way to approach highly correlated assets is to employ alternative investment
strategies that don’t usually mimic the performance of traditional stock and bond
markets. Investors use these strategies to help reduce risk and further diversify
their portfolios.
Consider: Prudential QMA Long-Short Equity Fund—Seeks to
provide a lower-volatility approach to equity investing through
stock market particpation with downside protection.
3. Mitigate Volatility and Seek Dependable Income—Smooth the Ride. A stream
of steady income can help cushion the impact of volatile markets. A portfolio that
diversifies across a variety of complementary equity, fixed income, and alternative
asset classes can be a way to smooth out volatility’s rough ride while providing
an attractive source of income.
Consider: Prudential Income Builder Fund—A diversified
income-oriented solution that seeks to balance yield, return,
and risk by investing in multiple asset classes.
These suggestions don’t necessarily apply only during volatile markets—they provide
diversification benefits that can serve your long-term needs as well. Your financial
professional can provide guidance on the investment markets and help you decide
if any of these strategies are right for you.
Page 2 of 4
Long-Short Equity investing involves
buying long equities that are expected
to increase in value and selling short
equities that are expected to decrease
in value. The potential benefit of adding
a Long-Short equity investment to a
portfolio is that it may reduce volatility.
While Long-Short strategies may increase
return in down markets, they are not
designed to capture all of an up market.
Perspectives ON volatility
DEFINITIONS
Correlation is a measurement that shows how different investments perform in relation to one another. A correlation of +1
means the investments perform similarly; a correlation of –1 means they move in opposite directions. Portfolios with assets
that have low or negative correlations tend to be less volatile than those with high correlations.
Barclays U.S. Aggregate Bond—an unmanaged index that represents securities that are SEC-registered, taxable, and
dollar-denominated. It covers the U.S. investment-grade fixed rate bond market, with index components for government
and corporate securities, mortgage pass-through securities, and asset-backed securities.
S&P 500 Index—an unmanaged, weighted index of 500 U.S. stocks, providing a broad indicator of price movement.
3-Month Treasury Bill (T-Bills)—short-term securities issued by the U.S. government that are generally considered to be
risk-free. Data is published by the U.S. Government.
Indices are unmanaged and an investment cannot be made directly into an index.
RISKS
The Prudential Short-Term Corporate Bond Fund may invest in high yield (“junk”) bonds, which are subject to greater credit
and market risks; mortgage-related securities, which are subject to prepayment and extension risks; short sales, which involve
costs and the risk of potentially unlimited losses; leveraging techniques, which may magnify losses; and derivative securities,
which may carry market, credit, and liquidity risks. Fixed income investments are subject to interest rate risk, and their value will
decline as interest rates rise. These risks may increase the Fund’s share price volatility.
The Prudential QMA Long-Short Fund may invest in equity and equity-related securities, where the value of a particular
security could go down resulting in a loss of money, including small and mid-cap securities, which may be subject to more
erratic market movements than large-cap stocks and large-cap stocks, which may go in and out of favor based on market
and economic conditions. The Fund may engage substantially in short sales (borrowing securities), which may prevent it from
implementing its investment strategy to the extent the Fund is obligated to cover a short position at a higher price, resulting
in a loss. Because the Fund’s loss on a short sale arises from increases in the value of the security sold short, such loss is
theoretically unlimited. The Fund may be subject to management and market risks, where the value of investments may decrease
and securities markets are volatile; active trading risk and high portfolio turnover result in higher transaction costs, which can
affect the Fund’s performance. The Fund’s subadvisor uses certain quantitative models to help guide its investment decisions.
The design of the underlying models may be flawed or incomplete, and it is impossible to completely eliminate the risk of error
in the implementation of these computer models. See the Fund’s prospectus for complete details of these risks. These risks may
result in greater share price volatility. It is anticipated that the Fund will typically have low net exposure to the equity markets, and
therefore the Fund’s returns should not be significantly affected by broad equity market movements. The Fund may not be suitable
for all investors.
The Prudential Income Builder Fund may invest in small- and mid-cap stocks, which may be subject to more erratic market
movements than large-cap stocks; high yield (“junk”) bonds, which are subject to greater credit and market risks; foreign
securities, which are subject to currency fluctuation and political uncertainty; leveraging, which may magnify losses; derivative
securities, which may carry market, credit, and liquidity risks; and master limited partnerships (MLP) and MLP-related
investments, which are subject to complicated and in some cases unsettled accounting, tax, and valuation issues as well as
risks related to limited control and limited rights to vote, potential conflicts of interest, cash flow, dilution, and limited liquidity
and risks related to the general partner’s right to force sales at undesirable times or prices. MLPs are also subject to risks relating
to their complex tax structure, including losing its tax status as a partnership, resulting in a reduction in the value of the MLP
investment and lower income to the Fund. Fixed income investments are subject to interest rate risk, and their value will decline
as interest rates rise.
Past performance is no guarantee of future results. Asset allocation and diversification do not guarantee a profit or protection
from loss in declining markets.
Page 3 of 4
Perspectives ON volatility
Neither the information contained herein nor any opinion expressed shall be construed to constitute
investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. This
commentary does not purport to provide any legal, tax, or accounting advice.
PRUDENTIAL INVESTMENTS
Prudential Investments ® strives to
be a leader in a broad range of
investments to help you stay on
course to the future you envision.
Our investment professionals also
manage money for major corporations
and pension funds around the world,
which means you benefit from the
same expertise, innovation, and
attention to risk demanded by today’s
most sophisticated investors. We
are part of Prudential Financial, a
company America has been bringing
its challenges to for more than 140
years. Bring us yours.
FOR MORE INFORMATION, contact
your financial professional or visit
our website at prudentialfunds.com/
marketvolatility.
Consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. The prospectus and summary prospectus
contain this and other information about the fund. Contact your financial professional for a prospectus and summary prospectus. Read them
carefully before investing.
Mutual funds are distributed by Prudential Investment Management Services LLC (PIMS). Prudential Fixed Income is a unit of PGIM, Inc. (PGIM), a registered investment advisor. QMA is the
primary business name of Quantitative Management Associates LLC, a wholly owned subsidiary of PGIM, Inc. (PGIM). PIMS and PGIM are Prudential Financial companies. ©2016 Prudential
Financial, Inc. and its related entities. The Prudential logo and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions
worldwide.
MUTUAL FUNDS • Are not insured by the FDIC or any federal government agency • May lose value • Are not a deposit of or guaranteed by any bank or any bank affiliate
0291196-00001-00 PI4451 Expiration: 11/30/2017