Dave Eldreth: Daren, in the paper, [A topic of current interest: Bonds or bond funds?] you mentioned there’s a common misconception among investors. Can you talk for a few minutes about what you call the principal-at-maturity myth?
Daren Roberts: Sure. The principal-at-maturity myth, this assumes that there’s an economic benefit to holding individual bonds to maturity. Now, the key word here is economic. And we generally hear this when there’s a risk of a higher-interest-rate environment. But irrespective of whether you own individual bonds or a bond fund, you’re still subject to the same interest rate risk, with prices really adjusting to reflect that term structure. So we don’t believe that there’s an economic case, especially if your principal is simply being sold and reinvested in another bond.
Now, there may be a practical benefit in holding individual bonds to maturity. So, for instance, if you have near-term liabilities and those liabilities are predictable, an investor can build a bond ladder where their principal and coupon cash flow can meet those obligations. But that’s not for the average retail investor. We see that, typically, more for the high-net-worth investor, oftentimes more an institutional investor.
And I would add [that] even in form and, actually, in substance, too, the investor is actually creating the same structure as that of a mutual fund, but it’s customized and likely they’re paying higher costs.
