This is page 1 of an 18 page article by Bob Veres (www.bobveres.com). Please go here to download the Full Article.
Synopsis: Here’s a new service that makes it easy to create bond portfolios, define how they’ll behave in future interest rate scenarios, and buy at institutional prices.
Takeaways: There are often better strategies for income or defensive purposes than the simple bond ladder.
Having covered sophisticated investment management strategies and portfolio management for 35 years, I feel like I’m starting to get the hang of it— except when it comes to investing in individual bonds. All of a sudden, instead of evaluating the prospects of a company or the track record of a mutual fund manager, you’re looking at maybe buying at a premium to get a higher coupon yield, managing duration in an ever-shifting interest rate environment where the consensus forecasts can be wrong for most of a decade, evaluating credit quality and scratching your head over pricing. Do you want tax-free, corporate or Treasury securities, or some combination of all of the above—and in what combination? When something happens to a company, state or municipality that affects the credit rating, how do you find out, and what do you do with that information?
Beyond that, every time you buy or sell, you’re wading into a market where the markups are not disclosed and the pricing is opaque. People who have noticed that they’re swimming in the same water as a school of sharks probably experience a similar feeling of vulnerability.
There are many good reasons to own individual bonds in a rising rate environment.
There are good reasons to own individual bonds. You control the taxation. You gain certainty about the cash flows (assuming no defaults). You can define your own strategy for managing the risk of rising interest rates, and even when those rates rise and erode the
value of the client’s bond holdings, clients don’t see themselves losing money on a mutual fund statement quarter after quarter after quarter. They see the certainty of coupon payments and the return of their principal on the maturity date. If there is a “bond apocalypse,” where higher rates lead to funds posting losses on their statements, leading to redemptions, leading to forced selling at a loss, leading to more unfortunate performance statement numbers, leading to another round of redemptions—well, let’s just say with individual bonds you have more control over your return experience.
But who wants to swim with sharks? Wouldn’t it be nice if you could just tell a trusted institutional buyer exactly what you want, and have their algorithms evaluate tens of thousands of issues, looking for the combination of yield, taxable or not, duration etc., and give you a customized portfolio for your clients exactly the way you want it, and then buy it for you at institutional prices?