BLP believes that owning a portfolio of individual bonds, with defined cash flows, is structurally better aligned to meet an investor’s goals of principal preservation, lower volatility, and more predicable outcomes. Bond funds do not allow for specific maturity dates or interest payments. Simply stated, if an investor buys a bond fund with an average maturity of 20 years, the fund will likely always have a maturity of 20 years.
Poor decisions by fellow shareholders in a bond fund may have a negative impact on fund performance and volatility. High levels of fund additions or redemptions make fund management difficult given that shareholder buy and sell decisions are usually emotionally charged and poorly timed. Moreover, the potential impact on municipal bond funds is amplified given that the municipal market is less liquid.
National Bond funds are not optimally structured to meet certain individual goals. Funds, especially index funds, are structured and managed largely based on issue volume and management benchmarks so California, New York and other high tax state issuers make up a very large percentage of most bond fund portfolios. For example, as of December 2018, the iShares National AMT-Free Muni Bond ETF (MUB) had 53% of the portfolio weighted in just four states, California (21%), New York (22%), Massachusetts (5%) and New Jersey (5%). In our view, this is an inefficient portfolio for most investors. On the other hand, bond funds offering state specific portfolios do not have the flexibility to purchase out-of-state bonds that offer better net of tax returns and are not diversified beyond state and US territory issues. In the end, investors should be looking for a diversified portfolio of bonds optimized to meet their specific needs and populated with issues paying the best net after tax yield per unit of risk.
Individual investors usually do not have the time or knowledge to manage a bond portfolio effectively.
In today’s fast changing markets it pays well to be both very conservative and very aggressive. BLP’s view is that most individual investors are aggressive when they should be conservative and conservative when they should be aggressive, with mistakes being particularly costly. Informed decisions make for wise decisions and it is difficult for most investors to remain informed.
A broker-dealer is not a fiduciary whose interests are aligned with the client and usually selects bonds from their own inventory creating significant conflicts of interest that may result in large price spreads and mark-ups. Alternatively, a focused bond manager is a fiduciary that can significantly reduce price-spreads, mark-ups and commissions by utilizing an extensive web of professional relationships and online trading platforms.
BLP believes that the municipal market is fundamentally inefficient. And that a focused manager, with significant trading and research experience, has the opportunity to add considerable value to portfolios. More so, when total assets managed is relatively small.
Spire Investment Partners is the parent company of Spire Wealth Management, LLC an SEC RIA.
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Glenn Ryhanych of BlueList Partners, LLC is affiliated with Spire Investment Partners, LLC.
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