Bond Management Strategy

[Fleur58]

My investment house advisor has recommended that I consider a managed bond portfolio, for potential maximum income in my IRAs. My general allocation is 50%equity/50% Bonds. The minimum for the managed bond strategy is $500,000. They would pick the bonds and the fee would be .4% annually. This works out to $2000 annually. Is this a reasonable fee?

I don't know anything about selecting individual bonds. Right now my funds are divided into 6 bond funds, the largest being DODIX. Could anyone recommend a low cost bond fund index strategy or other approach that would work out just as well? I prefer managed funds and not ETFs.

I may decide to leave my bonds as is, but I'm considering a new strategy because now I intend to go back to work. Won't need to access the money for another 9 years. I'm retired.

 

[VanWinkle]

My investment house advisor has recommended that I consider a managed bond portfolio, for potential maximum income in my IRAs. My general allocation is 50%equity/50% Bonds. The minimum for the managed bond strategy is $500,000. They would pick the bonds and the fee would be .4% annually. This works out to $2000 annually. Is this a reasonable fee?

I don't know anything about selecting individual bonds. Right now my funds are divided into 6 bond funds, the largest being DODIX. Could anyone recommend a low cost bond fund index strategy or other approach that would work out just as well? I prefer managed funds and not ETFs.

I may decide to leave my bonds as is, but I'm considering a new strategy because now I intend to go back to work. Won't need to access the money for another 9 years. I'm retired.

You might want to research the "spread" on individual bonds before deciding
that the cost is only .4%. In a low interest environment, the initial spread
on a bond purchase can eat up most of the yield the first year or two.
I have experience with this at Merrill Lynch and it was not pretty.

If you are buying bonds for safety, I like VBTLX which is the same as ETF BND from Vanguard.

 

[njhowie]

Considering where interest rates and bond prices are at this time, I would be wary. Further, I would question anything that my brokerage was pitching me - is it really for my benefit or theirs?

If you are comfortable with your current bond allocation/strategy, then stick with it. Ask your investment house advisor why their offering is better and how much more are they going to make for you above what you're currently getting and for less risk? Is the 0.4% fee all of the costs, or are they going to charge you commission every time the make a bond purchase/sale? Currently you're diversified with your 6 bond funds, how does it make sense to consolidate all into one? Let them explain that to you.

Could anyone recommend a low cost bond fund index strategy or other approach that would work out just as well? I prefer managed funds and not ETFs.

Can you clarify what you mean? Are you looking for specific fund recommendations? Or some type of recipe, maybe diversifying across short/medium/long term with high yield or high quality bonds?

 

[audreyh1]

My investment house advisor has recommended that I consider a managed bond portfolio, for potential maximum income in my IRAs. My general allocation is 50%equity/50% Bonds. The minimum for the managed bond strategy is $500,000. They would pick the bonds and the fee would be .4% annually. This works out to $2000 annually. Is this a reasonable fee?

I don't know anything about selecting individual bonds. Right now my funds are divided into 6 bond funds, the largest being DODIX. Could anyone recommend a low cost bond fund index strategy or other approach that would work out just as well? I prefer managed funds and not ETFs.

I may decide to leave my bonds as is, but I'm considering a new strategy because now I intend to go back to work. Won't need to access the money for another 9 years. I'm retired.

Leave your bond funds alone or simply transition to a broad low-cost bond index fund like VBTLX if you like. That’s not complicated. The investment advisor is looking to make more money off you.

 

[Montecfo]

DODIX is an excellent place to start. I personally use that, plus TPINX, DLNTX and RPHIX plus a mixture of CDs and MM funds.

These are all low-duration funds.

I also like closed-end fund NUV for some muni exposure. Though it is longer term, it is not nearly as rate sensitive as you might expect, and there is no leverage.

I would need to know that managers are investing in before looking at a managed bond portfolio, and the performance over time.

 

[bloom2708]

Buy Total US Bond and dump your advisor. You will come out way ahead. Fees kill.

 

[gwraigty]

I'm a DIY investor. I've spent about the last 15 years buying individual bonds, both corporate and muni. It's a lot of work, in research whenever new money needs to be invested, and tax prep. Lately, I've been transitioning to ETFs to cut down on the work load. IMO, you really don't get a lot more bang for your buck in buying individual bonds. Many ETFs are available commission free. Individual bonds are a bit riskier, too, although I've just recently been notified that one of our corporate issuers has declared bankruptcy. First time in 15 years. I guess I haven't done too badly then.

I know you said you prefer managed funds, and not ETFs. Any particular reason why? Nothing wrong with DODIX. It's one of the better bond options in my husband's HSA. It's current Distribution yield is 3.06%. For comparison, here are some ETFs that I'm using, with their current yields:

IGLB - iShares Long-Term Corporate Bond - 3.97% SEC - 4.06% Dist.
SPLB - SPDR Portfolio Long Term Corporate Bond - 3.96% SEC - 4.01% Dist.
FALN - iShares Fallen Angels USD Bond - 5.53% SEC - 5.62% Dist.
USHY - iShares Broad USD High Yield Corporate Bond - 5.85% SEC - 6.09% Dist.
IHYV - Invesco Corporate Income Value - 6.45% Dist.
SRLN - SPDR Blackstone / GSO Senior Loan - 5.70% SEC - 5.38% Dist.
PFF - iShares Preferred and Income Securities - 5.62% Dist.
PSK - SPDR Wells Fargo Preferred Stock ETF - 4.81% SEC - 5.84% Dist.
SPYD - SPDR Portfolio S&P 500 High Dividend ETF - 4.66% SEC - 4.47% Dist.
XSHD - Invesco S&P SmallCap High Dividend Low Volatility - 4.91% Dist.

IGLB and SPLB are long term investment grade corporate bond ETFs. You'll generate more income with long term than shorter term. I only say this because of your phrasing of "potential maximum income". DODIX is more intermediate, which is why it won't generate as much income as long term. A good selection for a general corporate bond ETF with a good distribution among short term, intermediate, and long term, might be SPXB - ProShares S&P 500® Bond ETF - 3.63% Dist.

Going down my list, the next 3 ETFs are below investment grade, which you may or may not be comfortable with, but you can see they generate more income. Each has a slightly different focus, maturity distribution, rating distribution. Overall, it's important to see what's under the hood. Some "junk"/high yield bond ETF/funds really do speculate with high weightings in below B level tranches, which I wouldn't be comfortable with at all.

SRLN is secured bank loan investments. PFF and PSK are preferred stock funds. The last 2 are higher yielding stock funds with some REIT and utilities exposures boosting the yields.

Of all the tickers mentioned above, only DODIX and SRLN are actively managed. The most conservative bond ETFs on the list, IMO, IGLB and SPLB, beat DODIX in generating income, not only currently, but since 2010, per Portfolio Visualizer. SPXB is only a little over a year old, but it's yield has been higher than DODIX since inception last year.

Just some food for thought. Or maybe a buffet.

 

[OldShooter]

... the fee would be .4% annually. This works out to $2000 annually. Is this a reasonable fee? ...

Well, assuming you will get maybe 2.5% +/-, that fee is taking 15-20% of your income. Of course, if the bond manager gets you higher return then his fee % is less. With higher return, though, comes higher risk. Ironclad rule. Pick your poison:

 

[pb4uski]

My bond strategy is to avoid bonds.... over the past 4 months or so I have found 5-year credit union CD specials, FDIC insured, that pay 3.5%. I'll admit there is a hassle factor since they are in my IRA... set up a savings account, then do the paperwork for a rollover from Vanguard to the credit union, etc.... but once it is done I'm set for 5 years.

There is a little residual that I need invested and I just buy Wellesley.... so for example, if I want $50k of bond exposure then I buy $83k of Wellesley ($50k/60%).

I certainly would not pay 0.4%.... 16% of the return assuming a 2.5% yield... for someone to manage it when I can have the good folks at Wellesley buy them for me for 0.16%.

 

[Fleur58]

Considering where interest rates and bond prices are at this time, I would be wary. Further, I would question anything that my brokerage was pitching me - is it really for my benefit or theirs?

If you are comfortable with your current bond allocation/strategy, then stick with it. Ask your investment house advisor why their offering is better and how much more are they going to make for you above what you're currently getting and for less risk? Is the 0.4% fee all of the costs, or are they going to charge you commission every time the make a bond purchase/sale? Currently you're diversified with your 6 bond funds, how does it make sense to consolidate all into one? Let them explain that to you.



Can you clarify what you mean? Are you looking for specific fund recommendations? Or some type of recipe, maybe diversifying across short/medium/long term with high yield or high quality bonds?

Howie,
I have 6 Bond Funds because I was following the Fidelity Insight Monitor Newsletter, but I stopped subscribing to them5 months ago. I also own Vanguard Wellesley and DODIX.
I am wary about fees as well. I wanted to know if there was an easier approach to income using some tried and true warriors. My investment house does charge a commission to buy Vanguard funds. The investors here are very experienced and I do value advice given here over my advisor who I am sure his goal is to sell managed funds. He is very convincing..... So Fund recommendations, a recipe...I am open to all advice.

 

[jimbee]

Buy Total US Bond and dump your advisor. You will come out way ahead. Fees kill.

8 percent return over the last 12 months ending July 31, 2019. Not bad.
https://investor.vanguard.com/mutual-funds/profile/overview/vbtlx

Update: It outperformed Vanguard Total Stock Market (VTSAX) over the same period. Wild.

 

[Freedom56]

My investment house advisor has recommended that I consider a managed bond portfolio, for potential maximum income in my IRAs. My general allocation is 50%equity/50% Bonds. The minimum for the managed bond strategy is $500,000. They would pick the bonds and the fee would be .4% annually. This works out to $2000 annually. Is this a reasonable fee?

I don't know anything about selecting individual bonds. Right now my funds are divided into 6 bond funds, the largest being DODIX. Could anyone recommend a low cost bond fund index strategy or other approach that would work out just as well? I prefer managed funds and not ETFs.

I may decide to leave my bonds as is, but I'm considering a new strategy because now I intend to go back to work. Won't need to access the money for another 9 years. I'm retired.

I have been managing my own bond portfolio for the past 30 years. I would not buy investment grade bonds right now. They are overpriced. Buying individual bonds and preferred stocks is all about timing. When markets sell off the bond ETFs and other passive bond funds liquidate to raise cash for redemptions. This scenario is extremely predictable and occurs about 1-2 times per year. Last year it was during the month of November and December. It is about to happen again. It's just a matter of time. I also would not hire some clueless individual to manage my portfolio. All they will do is sell you bonds that they have in inventory that nobody wants. Don't trust the rating agencies either. For example GE bonds are rated BBB+ and should be rated as CCC+ (lower tier junk) given they are selling assets to cover interest payments. Also many "A" rated bonds should be rated BBB- or lower (such as Boeing) given their risk and precarious cash flow situation. Rating agencies have serious conflict of interest with corporations and pension funds that pay their fees. You can't trust them completely.

If you want to play it safe, wait for a sell-off and buy preferred shares of money center banks (JP Morgan, Capital One, Citibank, Bank of America) who's coupons are greater than 6% and are trading below par. The alternative is also to buy short term notes (3-6 years) of these banks when their YTM hits about 5% or better. There are many sectors you should avoid completely for bonds/notes:

1- Retail chains
2- Mall REITs
3- Generic drugs
4- Energy (oil and gas, drilling)
5- Prison REITs
6- GE and Boeing Bonds (Ratings downgrades are coming for these)
7- Regional Banks

Avoid passive bond funds. Their yields are far too low given their risk not to mention their holdings in the above sectors. You are much better off with a money market fund than a passive bond fund/ETF.

 

[gwraigty]

I am wary about fees as well. I wanted to know if there was an easier approach to income using some tried and true warriors. My investment house does charge a commission to buy Vanguard funds. The investors here are very experienced and I do value advice given here over my advisor who I am sure his goal is to sell managed funds. He is very convincing..... So Fund recommendations, a recipe...I am open to all advice.

Can you use a mutual fund/ETF screener where you have your current investments? That's how I made my decisions.

 

[OldShooter]

... tried and true warriors ...

Buying brokered CDs and government bills/notes/bonds/TIPS at Schwab or Fido is beyond easy. No fees on brokered CDs, low/no fees to purchase govvies, and no ongoing fees on anything.

Personally, we buy only TIPS for anything we won't need soon and will buy money markets (SWVXX) or t-bills on the auction for shorter-term money.

We've never put a dime into a bond fund. Even if I took leave of my senses and proposed it, DW would veto.

 

[gwraigty]

There are many sectors you should avoid completely for bonds/notes:

1- Retail chains
2- Mall REITs
3- Generic drugs
4- Energy (oil and gas, drilling)
5- Prison REITs
6- GE and Boeing Bonds (Ratings downgrades are coming for these)
7- Regional Banks

Avoid passive bond funds. Their yields are far too low given their risk not to mention their holdings in the above sectors. You are much better off with a money market fund than a passive bond fund/ETF.

I mainly agree with you about the rating agencies. Just a quick observation about sectors though. During the financial collapse, it was the largest available sector for buying corporate bonds below par, in some cases, 80 to 90 cents on the dollar. I bought many individual issues during that time, all rated investment grade. All that I bought recovered their pricing in time. All were either called or matured. I suffered no losses at all and received interest and principal payments on time. Throwing out the baby with the bathwater, possibly. Or I was just extremely lucky.

My main regret, only in hindsight, was not buying more of AIG after they got bailed out. If I recall, an incredible coupon of over 8%, discounted to yield over 9%. I only bought 1 bond. It eventually got called.

Though I'm whittling down my individual issues, I do hold some in the retail chains and energy sectors. It's one of my issues in the energy sector that has declared bankruptcy.

As an example for the OP of an individual bond that is a household name, I bought Kraft Heinz Foods 2 years ago. Coupon of 4.375%, due 06/01/46, callable 12/01/45. Bought at 97.223, plain English, $9722.30 for $10,000 par value, a nice discount, for a current yield of 4.495% after commission. I'm still holding it. But you can see that it's not paying a hugely greater amount than just buying the comparable passive investment grade corporate bond ETF. You can see the portfolio holdings before buying.

I don't try to time the market. I'm not willing to let cash accumulate at 2% or less, waiting for the best time. A chart of IGLB, for example, shows that during the November/December time frame last year, the price dropped from about $56 to $55. Yields went from around 4.25% to over 4.6%. It was a short-lived opportunity, though nice if you had the available cash to take advantage of it.

 

[gwraigty]

Buying brokered CDs and government bills/notes/bonds/TIPS at Schwab or Fido is beyond easy. No fees on brokered CDs, low/no fees to purchase govvies, and no ongoing fees on anything.

Personally, we buy only TIPS for anything we won't need soon and will buy money markets (SWVXX) or t-bills on the auction for shorter-term money.

We've never put a dime into a bond fund. Even if I took leave of my senses and proposed it, DW would veto.

Even an ultra short bond fund/ETF yielding 2.6% to over 3%? Most have long term price fluctuations of less than $1.00. Keep mum to keep the peace, if you must. Just saying...

 

[Dtail]

Buying brokered CDs and government bills/notes/bonds/TIPS at Schwab or Fido is beyond easy. No fees on brokered CDs, low/no fees to purchase govvies, and no ongoing fees on anything.

Personally, we buy only TIPS for anything we won't need soon and will buy money markets (SWVXX) or t-bills on the auction for shorter-term money.

We've never put a dime into a bond fund. Even if I took leave of my senses and proposed it, DW would veto.

Not really a fan of bond funds either, but brokered CD's at Fido for example are really trailing in yields to comparable (regular) CD's at Credit Unions.

 

[OldShooter]

Re ultra short bond funds, avoiding bond funds is not a religion for us; it's the variable principal value and the fees that we don't like for longer funds. We're on the investment committee for a nonprofit and are running about $2M in individual bonds, all investment grade, almost always $10K per issue. So pretty well diversified. The advisor is permitted to buy only short and ultra-short bond funds when there is loose change to be parked.

Re CDs we only buy them occasionally and not recently, but I am far too lazy to transfer money around to chase yields. How many bps am I foregoing? I don't know and really haven't worried about it. YMMV, of course. @PB4 being the example.

 

[Which Roger]

Buy Total US Bond and dump your advisor. You will come out way ahead. Fees kill.

+1 That's all DW and I have been using for bonds since we discovered the Bogleheads many years ago. Can hardly beat the 0.05% ER, and it makes managing a portfolio very easy.

 

[pb4uski]

.... Re CDs we only buy them occasionally and not recently, but I am far too lazy to transfer money around to chase yields. How many bps am I foregoing? I don't know and really haven't worried about it. YMMV, of course. @PB4 being the example.

I concede sometimes wondering if it is worth it the hassle. Only done 3 so far... first being the PenFed 5-year 3% special from Dec 2013... second being a 3.5% 5-year Suncoast CU in April and most recent still in process... 3.5% 5-year from Navy Federal CU.

Current brokered 5-year CDs are 2.1% so I'm picking up 1.4% and soup-to-nuts spend probably 5 hours on the front end and 5 hours on the back end... so about $1,500/hour.

 

[OldShooter]

I concede sometimes wondering if it is worth it the hassle. Only done 3 so far... first being the PenFed 5-year 3% special from Dec 2013... second being a 3.5% 5-year Suncoast CU in April and most recent still in process... 3.5% 5-year from Navy Federal CU.

Current brokered 5-year CDs are 2.1% so I'm picking up 1.4% and soup-to-nuts spend probably 5 hours on the front end and 5 hours on the back end... so about $1,500/hour.

Hmm ... For that kind of numbers I might be temped to get out of my easy chair and do a little work.

 

[Dtail]

I concede sometimes wondering if it is worth it the hassle. Only done 3 so far... first being the PenFed 5-year 3% special from Dec 2013... second being a 3.5% 5-year Suncoast CU in April and most recent still in process... 3.5% 5-year from Navy Federal CU.

Current brokered 5-year CDs are 2.1% so I'm picking up 1.4% and soup-to-nuts spend probably 5 hours on the front end and 5 hours on the back end... so about $1,500/hour.

Exactly. In this interest rate environment, 1.4% can add up enough. I am looking at the Space Coast CU which has similar duration rates.

 

[Freedom56]

I mainly agree with you about the rating agencies. Just a quick observation about sectors though. During the financial collapse, it was the largest available sector for buying corporate bonds below par, in some cases, 80 to 90 cents on the dollar. I bought many individual issues during that time, all rated investment grade. All that I bought recovered their pricing in time. All were either called or matured. I suffered no losses at all and received interest and principal payments on time. Throwing out the baby with the bathwater, possibly. Or I was just extremely lucky.

My main regret, only in hindsight, was not buying more of AIG after they got bailed out. If I recall, an incredible coupon of over 8%, discounted to yield over 9%. I only bought 1 bond. It eventually got called.

Though I'm whittling down my individual issues, I do hold some in the retail chains and energy sectors. It's one of my issues in the energy sector that has declared bankruptcy.

As an example for the OP of an individual bond that is a household name, I bought Kraft Heinz Foods 2 years ago. Coupon of 4.375%, due 06/01/46, callable 12/01/45. Bought at 97.223, plain English, $9722.30 for $10,000 par value, a nice discount, for a current yield of 4.495% after commission. I'm still holding it. But you can see that it's not paying a hugely greater amount than just buying the comparable passive investment grade corporate bond ETF. You can see the portfolio holdings before buying.

I don't try to time the market. I'm not willing to let cash accumulate at 2% or less, waiting for the best time. A chart of IGLB, for example, shows that during the November/December time frame last year, the price dropped from about $56 to $55. Yields went from around 4.25% to over 4.6%. It was a short-lived opportunity, though nice if you had the available cash to take advantage of it.

I will always time the market when it comes to bond purchases/sales. I have just over 20% in cash/money markets right now and increasing monthly as coupon payments come in. I dumped all my preferred stocks and baby bonds that I acquired last November and December during the month of April. I was up as much as 19% in some cases plus the coupon payments.

Kraft Heinz is a complete mess. Fidelity was trying to push Kraft Heinz bonds onto me about 18 months ago. They had an awful lot in inventory. During one week, I received 6 calls from their bond desk pushing those bonds. I would never buy a bond at almost 30 years to maturity at such a low yield. You are better off buying short term high yield bonds/notes of companies with good cash flows than investment grade companies that are headed for a downgrade. Even an investment grade perpetual preferred of a money center bank with yield over 6% is a better option.

 

[Montecfo]

I have been managing my own bond portfolio for the past 30 years. I would not buy investment grade bonds right now. They are overpriced. Buying individual bonds and preferred stocks is all about timing. When markets sell off the bond ETFs and other passive bond funds liquidate to raise cash for redemptions. This scenario is extremely predictable and occurs about 1-2 times per year. Last year it was during the month of November and December. It is about to happen again. It's just a matter of time. I also would not hire some clueless individual to manage my portfolio. All they will do is sell you bonds that they have in inventory that nobody wants. Don't trust the rating agencies either. For example GE bonds are rated BBB+ and should be rated as CCC+ (lower tier junk) given they are selling assets to cover interest payments. Also many "A" rated bonds should be rated BBB- or lower (such as Boeing) given their risk and precarious cash flow situation. Rating agencies have serious conflict of interest with corporations and pension funds that pay their fees. You can't trust them completely.

If you want to play it safe, wait for a sell-off and buy preferred shares of money center banks (JP Morgan, Capital One, Citibank, Bank of America) who's coupons are greater than 6% and are trading below par. The alternative is also to buy short term notes (3-6 years) of these banks when their YTM hits about 5% or better. There are many sectors you should avoid completely for bonds/notes:

1- Retail chains
2- Mall REITs
3- Generic drugs
4- Energy (oil and gas, drilling)
5- Prison REITs
6- GE and Boeing Bonds (Ratings downgrades are coming for these)
7- Regional Banks

Avoid passive bond funds. Their yields are far too low given their risk not to mention their holdings in the above sectors. You are much better off with a money market fund than a passive bond fund/ETF.

For similar reasons, I find it wise to avoid bond indices. You are buying an increasing amount of near-junk, as that part of the market has grown so much, and underwriting standards have slipped. Recessions will not be kind to those issuers.

I think you want managed investing when you are talking about the bond markets. It is very different than equities.

 

[DrRoy]

Isn't .4% a rather large portion of the return on the bonds?