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Bond Management
Bond Management is one of our areas of expertise. What many investors do not realize is that there are two critical components in the process of managing a bond portfolio. We have outlined both areas below.
The Bond Trading Desk is the first critical area of bond portfolio management. The bond market is not like stocks traded on the exchange where information is readily available. Commissions and spreads can range dramatically between different bond dealers and brokers. We estimate the retail investor can loss from .5% to 2.5% per trade to acquire a bond. The second issue is bond liquidation. Retail investors are often forced to sell bonds at unfavorable discounts. Typically, this arises from small lots of under $100,000 or poor broker distribution channels. Our Bond Trading Desk helps to mitigate this liquidity risk.
Portfolio Management is the second critical area. This can range from a simple laddered bond portfolio to a portfolio designed to seek total return through price appreciation and interest. We have found that most financial professionals have the ability to discuss a bonds feature like par value, current yield, YTC or YTM with a client. However, does your adviser start addressing a portfolio’s duration or make convexity adjustments to understand the full impact of interest rate changes on the portfolio? We have provided a graph below to illustrate the potential risk by not using the appropriate measurements.
Potential Loss Due to Wrong Measurement
Understanding the full risk exposure is critical even when managing what is typically defined as a “safe” asset class. Above, we briefly discussed and outlined interest rate risk exposure. Other risks that are evaluated are Yield Curve Risk, Reinvestment Risk, Credit Risk, Liquidity Risk, Inflation Risk, Volatility Risk and Event Risk.
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