Where Advisors See the Best Bond Values
Views on where to go for the best bond returns are as varied as advisor hairstyles. But that doesn’t stop FAs from touting their favorite picks. While many prefer to select their own bond mutual funds or ETFs, others swear it’s best to leave that job to external experts who build separately managed accounts. There’s also little consensus on whether total-return strategies are better for the average client than go-anywhere strategies that may harbor more credit and derivative risks.
As FA-IQ has reported, lots of advisors are rethinking clients’ fixed-income strategies in the face of market uncertainty. But Margaret Starner believes in nurturing long-term relationships with a small number of portfolio managers. She runs the Starner Group of Raymond James & Associates, which manages $600 million in Coral Gables, Fla. “We don’t change managers much, because the people who are good stay good,” says Starner, who wouldn’t name specific managers or their holdings. “We’ve been using some for over 20 years.”
For clients with the assets, stomach and sophistication to handle a little volatility, Starner taps external managers who use emerging-market debt and closed-end muni funds, some of which can yield up to 6%.
Hedgelike and opportunistic strategies are front and center at Twelve Points Wealth Management, according to Igor Tiguy. He’s an advisor at the Concord, Mass., firm, which oversees $50 million. Aggressive and conservative clients use the same funds but get different allocations.
Hedgelike funds include absolute returns like JPMorgan Strategic Income Opportunities Fund (JSOSX), long-shorts like Altegris Fixed Income Long Short Fund (FXDIX) and global macros like Eaton Vance Global Macro Absolute Return Fund (EIGMX). Twelve Points also is considering event-driven strategies like the Arbitrage Event-Driven Fund (AEDNX), Tiguy says. The firm uses closed-end funds to find attractive or mispriced holdings and take advantage of discounts to net asset value — for example, the Eaton Vance Floating-Rate Fund (EIBLX) of bank loans, as well as high-yield muni funds.
“Most people have written off the fixed-income asset class as nowhere to gain yield now,” Tiguy says. “That is true in traditional bonds. However, it is a time to look to manager skill. They can find value.”
Munis and Corporates
Many advisors find plenty to like in the municipal and corporate bond markets. FA-IQ asked for top picks from Ian Weinberg of Family Wealth & Pension Management in Woodbury, N.Y., as well as Eddie Bernhardt of SNW Asset Management in Seattle, Wash., and Justin Land of Wasmer, Schroeder & Co. in Naples, Fla. Weinberg’s RIA manages $250 million. (The two subadvisor firms oversee $2.5 billion and $4.9 billion, respectively.)
For munis, Weinberg favors individually structured portfolios from Lord Abbett and comparable managers. These often consist of AA-rated New York and New Jersey revenue bonds such as Triborough Bridge and Tunnel Authority or other toll-collector issues. Bernhardt likes Florida, Utah and Texas because they have minimal state income tax and conservative fiscal management. He thinks clients can get safe income from their water and sewer, health care, university or electric-generator bonds. Land prefers revenue bonds from airports, state housing agencies and universities, but says general-obligation bonds are OK if they’re issued by high-quality school districts or large, wealthy states. He sees value in Florida and Charlotte, N.C.
For corporates, Bernhardt likes JPMorgan and other systematically important banks, because he thinks their books are largely sound; NASDAQ because the exchange is rated B but should, in his opinion, be rated A; and Monsanto because, since demand remains high for its products, he believes the market overreacted to its July share buyback. Land likes large financials as well, plus energy firms like BP in the U.K. and Canadian regional suppliers that act like quasi-municipal entities.
No bond recommendation is complete without a talk about interest rates, warns Chris Cook, president of Beacon Capital Management, which oversees $925 million in Dayton, Ohio. Clients always ask about them. When they do, Cook admits he’s no forecaster. That’s why he plays it safe with Vanguard’s Long-Term Bond (BLV), Intermediate-Term Bond (BIV) and Short-Term Bond (BSV) ETFs. Cook’s clients sometimes ask why the firm keeps longer-term bonds even though they may soon fall in value. “I say, ‘I’ve thought rates would rise over the last five years. Well, I’ve been wrong.’”