Trouble for Bonds
Oh no, the party is over! Investors can no longer assume that their 2018 bond portfolio’s positive returns will be a “piece of cake”.
In 2017, bond returns were positive AND above average. These returns when combined with the notion that bond money was “safe” money had investors very happy. But is bond money really safe money NOW? It would not appear so. For example, as of September 10th, two popular ETF’s that track investment grade bond indices, AGG and LQD, are down year-to-date -1.11% and -3.08%, respectively. No doubt this gives great concern to the individuals that hold bonds in their portfolio, leaving them wondering what exactly is going on AND what they should do.
The lackluster returns for the bond market can be traced back to our growing GDP (growing 3.5%-4% in Q2 of this year) and rising interest rates and inflation. When interest rates rise, bond returns suffer. Sustainable GDP growth is wonderful and something the people love to see, but with this growth comes inflation. With inflation looking to top the 2% desired yearly increase, the Fed seems to want to step in with increasing rates to keep this inflation down.
In the past several years, bond investors were safe using ETFs or bond index funds. However, the tide appears to have turned and active management seems to be the best way to protect this side of one’s portfolio.
Why should you have an active bond manager? Lord Abbett writes “certain opportunities exist as a result of the diverse goals and priorities of market participants, often with objectives other than total return.” A recent study on Morningstar found that nearly two-thirds of actively managed bond funds did better than a best-fit portfolio of bond exchange-traded funds. Lord Abbett also writes on five key advantages of active bond management:
The idiosyncratic nature of the bond market offers active managers a better chance to exploit opportunities.
Active managers have the potential to control risk by avoiding overexposure to questionable credits.
They also are better positioned to steer clear of credits with weak management or deteriorating financial conditions.
An active approach provides the flexibility to rotate among sectors and allows for optimal changes in portfolio weightings.
Actively managed portfolios also may offer a better fit with client objectives and risk tolerances than a passive approach.
Have you checked on your bond allocation recently? Do you know exactly what you own, or mitigated any additional risk? What type of bonds are you in? What types of bond maturities are best in this economic cycle? These are questions you shouldn’t have to answer alone. Now is the time to have an active bond manager more than ever.
Portia Capital Management is a Fort Worth, TX based Registered Investment Advisor which specializes in managing assets for corporations, endowments, and high net worth individuals. Michelle Connell, owner and CIO is an industry leader with over 20years of Wall Street experience. She’s an adjunct finance professor, avid cyclist, and runs an amazing charity. If you’re interested in having the only female-owned RIA in Fort Worth help steward your assets, please contact us to set up a meeting.
Abbett, L. (Ed.). (2017). Five Key Advantages of Active Bond Management. Retrieved September 9, 2018.
Lavine, B. (july 23, 2018). Growing Risk In Corporate Bond ETFs. Retrieved September 9, 2018.
Chandra, S. (2018). Highest Core Inflation in Decade Flattens Real U.S. Wage Growth. Retrieved September 9, 2018.