Who's Smarter?

Do you rely on a bond fund manager or do you rely on a professional fixed income Asset Manager? What’s the right approach? The answer depends first and foremost on the size of your asset pool. We believe if your portfolio is at least $250,000, you’re much better off doing it yourself, with appropriate professional help, of course. Read on to discover why we say that.

In an article in Monday’s Wall Street Journal entitled “The New Bond Market”, reporter Colin Barr lists a number of concerns regarding the current state of affairs in the bond markets. It’s recommended reading for both traders and investors, particularly for those who have put their faith in mutual funds and bond supported ETF’s.

We have said it for a long time and we’ll repeat ourselves here. Bond funds and ETF’s are not bonds. Owners are kidding themselves if they think that and they need to recognize the differences between these asset types. True bond investors own assets with date certain expirations. They know with no doubt exactly when their principal will be returned. Fund holders have no such expectation and continually place themselves at the mercy of both markets and the decision making process of the fund manager. This fundamental difference is critical to the investor and those who do not understand what’s going on run serious risks. Bond funds for the most part, never mature. They are not bonds, they’re income producing vehicles, period.

Bond fund investors get diversification for small dollar purchases, unavailable to them in direct purchases of individual bonds. The investor has no control of the portfolio’s structure, duration, risk profile, and most importantly, fees. He pays management fees, he pays expense fees, and in many cases he pays a load to the broker who sells the fund. He lives with constant exposure to market risk and volatility.

An Individual who retain the services of a professional Asset Manager can dictate many of the parameters of the portfolio’s construction. In addition he or she gets predictable monthly income, a known duration and maturity. He or she gets diversification if the portfolio is as small as $250,000. He gets low turnover, he gets reinvestment and risk management. Finally, the fees paid are usually very competitive with bond fund annual expenses and in many cases they’re lower.

In periods of adverse conditions for bonds, funds are frequently forced into liquidating holdings to cover redemptions. Holders may very well see their investments lose considerable value and there is no guarantee that those losses will be recaptured. Individually managed portfolios on the other hand, only realize losses if there is a requirement to sell a position. Managers and investors can consult over the process and take advantage of tax situations to minimize adverse consequences.

From our perspective, the advantages available to investors who utilize a professional fixed income manager make it an unfair fight. They win every time.

Authored By Ted Palatucci and Fred Offerberg - The Andres Team -