During the Summer, we featured “Research & Trading” in one of our Behind the Scenes blog posts. That blog post should have been more precisely titled “Equity Trading” because it didn’t highlight all of the work being done by the team at P&A to include individual bonds in our client portfolios.
In general, if we have a portfolio that is large enough in size, and with a large enough allocation to Fixed Income in its target asset allocation, we will consider using individual bonds in the portfolio. Finding bonds to include in a client portfolio works a bit differently than buying individual stocks. The stock exchanges provide a centralized point for buying stocks. The universe of bonds available for purchase does not have a similar type of venue and is much more decentralized. We find bonds – both new offerings and existing bonds offered for purchase – from a variety of sources. Our custodian, Charles Schwab, has a healthy inventory of bonds, but we also have connections and relationships with a number of bond brokers that enables us to find additional bonds that might be better suited for a client portfolio. Bonds have several unique features that need to be evaluated to see if they are a good fit for a client’s portfolio. Each client portfolio is different, and it is important to find the right “fit” of bond. This often is driven by the maturity schedule in the portfolio, but also can be based on the client’s tax picture, geography, and cash needs.
The Fixed Income trading team that does this valuable work is made up of Shane, Diane, Dan Anderson, and Jaxson. Shane, Diane, and Dan lead up our bond analysis and buying and Jaxson helps the team on the back end identifying bonds coming due, either from maturities or calls, as well as new client fixed income needs. A good deal of fixed income trading is dependent on experience and accumulated knowledge. Because individual bonds can have many varied features – maturity date, credit rating, call feature, geography, payment source (revenue, general obligation, etc.) – the analysis of the investments relies heavily on knowing what has been offered in the past and how the current offerings compare. Our Fixed Income team spends a lot of time evaluating the various bonds that come available and are in regular contact with bond brokers to understand what is available and putting in bids to buy bonds.
P&A’s general philosophy on buying bonds is to hold them to maturity. We target high quality bonds (i.e., non-junk rated) and want to earn a reasonable yield to maturity for the risk level of the bond. Our fixed income trading team seeks to keep a laddered approach in fixed income portion of most clients’ portfolio. This ladder means staggering out the maturity dates of the bond holdings, so the client has a rolling set of maturities, which allows the portfolio a cash generation source, and the ability to reinvest the proceeds into new maturities. As history has taught us, interest rates will fluctuate and having a bond ladder helps take some of the angst out of moves (up or down) in interest rates.
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Pittenger & Anderson, Inc. does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Additionally, the information presented here is not intended to be a recommendation to buy or sell any specific security. To learn more about our firm and investment approach, check out our Form ADV.
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