12b-1

Who knows…why can’t the industry just call the 12b-1 what it is…an advisor servicing fee.  If the label was thus, do you think we’d be having this controversy?

They will just change the name, if they eliminate 12b-1 altogether no one will service accounts and there will be more churning of funds. The FPA is even against this and they are for every reform that hurts commission based advisors it seems.

I'll take it a step further.  In addition to changing the name to "advisor servicing fee" itemize the fee in dollars and a percentage on the statement.  Once this is done, hopefully we can move forward and never bring up this hidden trail issue again.

Very few actually service the accounts anyway. Let’s face it; trails are paid so

brokers will keep the money in the fund family anyway. I say do away with

the service fees altogether, and cut the commisions to 2%. That would

seperate the wheat from the chaff.

You are suggesting that on A shares they cut the commish down to 2%? Perhaps a one-time bump from 1 to 2% on C shares and then no ongoing trails could be another option…

Yes, that’s what I’m suggesting. Then do away with the “share classes”.

[quote=Philo Kvetch]Yes, that's what I'm suggesting. Then do away with the "share classes".[/quote]

I think commissions should be based on race classes of the clients and not share classes.

I couldn't help it.

What, I wonder, would Don Imus say to that?

I think there has to be more rules about when certain share classes are

used, not fewer share classes. If an advisor uses the share classes

appropriatley, they work. Honestly, I have a hard time charging someone

5.75% when they only have small amounts. I would rather take their little

IRA rollover and put it in a B-share. If they aren’t planning on doing

anything with it soon, there’s no issue with the CDSC. And I sure ain’t

servicing a $20K account very often (thus a C-share is not really

appropriate). However, if I can hit major breakpoints with one family, and

I need another fund family for certain segments (i.e. growth or smallcaps

when AMF are my core value holdings), I will use a C-share for small

amounts in other families.



Plus, telling someone their only option is an A-share just isn’t right.

Why not? That’s the only investment class in every other investment

category, save VAs.



Open ended mutual funds are a shuck anyway. They’re OK for investors with

VERY limited resources, but few if any are worth the fees and expenses that

they charge. There’s what, 15,000 funds in the US? None of them

consistently beat the indices. You can’t use stops or limits or option them.

In fact, there was a time not too many years ago that the commissions were

8+%. (Now THAT was a great deal for brokers who didn’t know what they

were doing!)

[quote=Philo Kvetch]Why not? That's the only investment class in every other investment
category, save VAs.

Open ended mutual funds are a shuck anyway. They're OK for investors with
VERY limited resources, but few if any are worth the fees and expenses that
they charge. There's what, 15,000 funds in the US? None of them
consistently beat the indices. [/quote]

I respectfully disagree. I'm not the biggest mutual fund guy out there(I'd have to change my screen name if I was) but I consistantly find funds that are worth the time, effort and expense. And we put some very wealthy people into these funds.

My experience shows that seperate acct management to be the poorer performer. And I particularly dislike the slimmy marketing surrounding these accounts. Giving clients cookie cutter off the rack investment accounts when they're being told they're getting custom tailored portfolios is beyond my comfort level. A subject for another thread.

[quote=BondGuy]

[quote=Philo Kvetch]Why not? That’s the only

investment class in every other investment category, save VAs. Open

ended mutual funds are a shuck anyway. They’re OK for investors with

VERY limited resources, but few if any are worth the fees and expenses

that they charge. There’s what, 15,000 funds in the US? None of them

consistently beat the indices. [/quote]

I respectfully disagree. I’m not the biggest mutual fund guy out there

(I’d have to change my screen name if I was) but I consistantly find funds

that are worth the time, effort and expense. And we put some very

wealthy people into these funds.

My experience shows that seperate acct management to be the poorer

performer. And I particularly dislike the slimmy marketing surrounding

these accounts. Giving clients cookie cutter off the rack investment

accounts when they’re being told they’re getting custom tailored

portfolios is beyond my comfort level. A subject for another thread.

[quote=Broker24]Plus, telling someone their only option is an A-share just isn’t right.[/quote]



Using A shares’ isn’t right either, nor B-shares with the 1% trailers and exit fee.



The B/d side is afraid to itemise charges, since then clients would know what they are paying for and not getting.



The move against 12b-1 fee’s is yet another nail in coffin of the
traditional B/d model. IMHO 12b-1 fee’s should be capped at 0.25% and
then all multi share class (other than Institutional shares) abolished.
Same thing for “revenue sharing” via cash payments.



At that point B/Ds that want to change comissions will do so openly, and not secretly via a kickback from the fund company.

[quote=Philo Kvetch] We’ll have to agree to disagree, BG. I, too, dislike the 'cookie cutter’

investment portfolios run through outside money managers. They’re

generally little more than glorified mutual funds, albeit somewhat

cheaper. I maintain that the client is best served in house, provided that

he/she is philosophically aligned with the F/A insofar as investing is

concerned.[/quote]



It really depends. SMA’s for bonds can make sense, mostly because its not worth my time (in a fee platform) to hustle bonds.



But for stocks, very dubious. Once the SMA’s get down the the 60bp level, then it makes sense to talk.

[quote=AllREIT]

[quote=Philo Kvetch] We’ll have to agree to disagree, BG. I, too, dislike the 'cookie cutter’

investment portfolios run through outside money managers. They’re

generally little more than glorified mutual funds, albeit somewhat

cheaper. I maintain that the client is best served in house, provided that

he/she is philosophically aligned with the F/A insofar as investing is

concerned.[/quote]



It really depends. SMA’s for bonds can make sense, mostly because its not worth my time (in a fee platform) to hustle bonds.



But for stocks, very dubious. Once the SMA’s get down the the 60bp level, then it makes sense to talk.

[/quote]

Only with clients who don’t have enough money to buy a diversified bond portfolio would I put them into a bond fund (or an SMA)  For almost everyone else, I have them buy bonds outright in a standard brokerage account (no fees)

As for SMAs, where I work, none of them get more than 42bp, and most of them get 30bp.  The total expense is 50bp (the balance going to the firm)  Anything above that that the client is charged goes to the grid.

[quote=BondGuy]

[quote=Philo Kvetch]Why not? That’s the only investment class in every other investment
category, save VAs.

Open ended mutual funds are a shuck anyway. They’re OK for investors with
VERY limited resources, but few if any are worth the fees and expenses that
they charge. There’s what, 15,000 funds in the US? None of them
consistently beat the indices. [/quote]

I respectfully disagree. I'm not the biggest mutual fund guy out there(I'd have to change my screen name if I was) but I consistantly find funds that are worth the time, effort and expense. And we put some very wealthy people into these funds.

My experience shows that seperate acct management to be the poorer performer. And I particularly dislike the slimmy marketing surrounding these accounts. Giving clients cookie cutter off the rack investment accounts when they're being told they're getting custom tailored portfolios is beyond my comfort level. A subject for another thread.

[quote=Philo Kvetch] [quote=BondGuy]

[quote=Philo Kvetch]Why not? That’s the only

investment class in every other investment category, save VAs. Open

ended mutual funds are a shuck anyway. They’re OK for investors with

VERY limited resources, but few if any are worth the fees and expenses

that they charge. There’s what, 15,000 funds in the US? None of them

consistently beat the indices. [/quote]

I respectfully disagree. I’m not the biggest mutual fund guy out there

(I’d have to change my screen name if I was) but I consistantly find funds

that are worth the time, effort and expense. And we put some very

wealthy people into these funds.

My experience shows that seperate acct management to be the poorer

performer. And I particularly dislike the slimmy marketing surrounding

these accounts. Giving clients cookie cutter off the rack investment

accounts when they’re being told they’re getting custom tailored

portfolios is beyond my comfort level. A subject for another thread.

But towards what end, MM? You’ve heard these guys. They never agree on

anything. One says greatest bull market in history, the guy on the other side

says imminent depression. Diviersify between those two and you get no

gain at best.



No, I think the client is best served by buying best of breed and a spread

across several asset classes.

[quote=Philo Kvetch]But towards what end, MM? You’ve heard these guys. They never agree on

anything. One says greatest bull market in history, the guy on the other side

says imminent depression. Diviersify between those two and you get no

gain at best.



No, I think the client is best served by buying best of breed and a spread

across several asset classes.[/quote]

What do you mean by the term 'best of breed?'

By the way, I wasn’t referring to intellectual diversification amongst bulls and bears.  I was referring to the intellectual diversification one gets by employing several different money managers, each one being the best (or among the best) in their style and asset class. (maybe that’s what you mean by best of breed?)

Again, we’ll have to agree to disagree. Certainly I’ve not investigated

anywhere near all of the outside money managers, but what I have seen,

generally, I haven’t liked. Therefor, I don’t use SMAs.

OHHH MYYYY....... Mr. Advisor, You mean that I have to pay for your service when I could of invested for free in this no-load investment over here????.... I AM OUTRAGED!!!!

Yes that is right Mr. Client, NOTHING IN THIS WORLD IS FREE!!!!!

PLEASE, PLEase, please, stop condemning others for getting paid for their services. Fees, commissions, etc. boil down to getting paid for what we do.  Fees are not right for everyone just as commission is not right for everyone, but tell me this, it we eliminate one how long until that 1% avg fee is widdled down to 10bps, because after all why should someone have to pay for their service. Or on the other hand if we eliminate fees, how long until the commissions are 10bps for the same reason.

Now don't get me wrong, I think everything should be fully disclosed, but this attitude that my sh*t does not stink because I do fee only or commission only, or whatever is only because your sh*t hasn't been in the sun as long... but give it time and the flies will come.

Just my 2 cents

[quote=doneWjones]

OHHH MYYYY....... Mr. Advisor, You mean that I have to pay for your service when I could of invested for free in this no-load investment over here????.... I AM OUTRAGED!!!!

Yes that is right Mr. Client, NOTHING IN THIS WORLD IS FREE!!!!!

PLEASE, PLEase, please, stop condemning others for getting paid for their services. Fees, commissions, etc. boil down to getting paid for what we do.  Fees are not right for everyone just as commission is not right for everyone, but tell me this, it we eliminate one how long until that 1% avg fee is widdled down to 10bps, because after all why should someone have to pay for their service. Or on the other hand if we eliminate fees, how long until the commissions are 10bps for the same reason.

Now don't get me wrong, I think everything should be fully disclosed, but this attitude that my sh*t does not stink because I do fee only or commission only, or whatever is only because your sh*t hasn't been in the sun as long... but give it time and the flies will come.

Just my 2 cents

[/quote]

WTF are you talking about?

[quote=Philo Kvetch][quote=doneWjones]

OHHH MYYYY....... Mr. Advisor, You mean that I have to pay for your service when I could of invested for free in this no-load investment over here????.... I AM OUTRAGED!!!!

Yes that is right Mr. Client, NOTHING IN THIS WORLD IS FREE!!!!!

PLEASE, PLEase, please, stop condemning others for getting paid for their services. Fees, commissions, etc. boil down to getting paid for what we do.  Fees are not right for everyone just as commission is not right for everyone, but tell me this, it we eliminate one how long until that 1% avg fee is widdled down to 10bps, because after all why should someone have to pay for their service. Or on the other hand if we eliminate fees, how long until the commissions are 10bps for the same reason.

Now don't get me wrong, I think everything should be fully disclosed, but this attitude that my sh*t does not stink because I do fee only or commission only, or whatever is only because your sh*t hasn't been in the sun as long... but give it time and the flies will come.

Just my 2 cents

[/quote]

WTF are you talking about?

Here's a wild and crazy idea. Why not let the free market dictate what the fees will be?

Did you know that Hershey pays Wal-Mart a placement fee (revenue sharing?) to be placed in a better location than say, a zagnut?  That doesn't bother me at all.  If I'm willing to pay $.75 for a candy bar, then I'm wiling to pay $.75.  I don't care if $.15 went to Wal-Mart, or if $.05 went to the sales guy, I don't care. I want a candy bar, I'm ok with the cost to me, what's the problem? It should be the same with investments.

I do believe that there should be a "fee sheet" that is a one page document that the client has to sign (kind of a like a prospectus receipt).  It would be very simple, and have all the fees in 18 point font, laid out as straightforward as possible.  ALL the fees (back-end, front-end, annual, surrender schedule, etc.). 

If the client is ok with the fee, I don't see a problem. 

Now, if the client ever sues the broker, the broker better be able to justify putting the client into firm-owned (or revenue shared) funds, or the high commission product. But, if the advisor is keeping good notes (don't we all), and actually does have a valid reason for using that VA, non-traded REIT, preferred fund, etc., then there should not be a problem.

[quote=Philo Kvetch]

[/quote]

We'll have to agree to disagree, BG. I, too, dislike the 'cookie cutter'
investment portfolios run through outside money managers. They're
generally little more than glorified mutual funds, albeit somewhat
cheaper. I maintain that the client is best served in house, provided that
he/she is philosophically aligned with the F/A insofar as investing is
concerned.[/quote]

+1

[quote=now_indy]

Here's a wild and crazy idea. Why not let the free market dictate what the fees will be?

Did you know that Hershey pays Wal-Mart a placement fee (revenue sharing?) to be placed in a better location than say, a zagnut?  That doesn't bother me at all.  If I'm willing to pay $.75 for a candy bar, then I'm wiling to pay $.75.  I don't care if $.15 went to Wal-Mart, or if $.05 went to the sales guy, I don't care. I want a candy bar, I'm ok with the cost to me, what's the problem? It should be the same with investments.

I do believe that there should be a "fee sheet" that is a one page document that the client has to sign (kind of a like a prospectus receipt).  It would be very simple, and have all the fees in 18 point font, laid out as straightforward as possible.  ALL the fees (back-end, front-end, annual, surrender schedule, etc.). 

If the client is ok with the fee, I don't see a problem. 

[/quote]

The problem isn't paying 75 cents for a candy bary.  The hidden fees in a mutual fund are like agreeing to pay 75 cents for a candy bar only to find that Wal Mart took 78 cents from your bank account.  Except they didn't really debit you for 78 cents, they just took the extra 3 cents off of the interest credit the bank was going to give you that month.  The didn't really charge you 3 extra cents...

You're spot on with the fee disclosure in 18 point font.  The problem isn't at all with 12-b1 or any fees for that matter.  The problem is in the disclosure.

I have been using C shares for several years now and always explain the fees just as I do with fee based accounts. Clients do not complain as long as they understand.

I think the fee disclosure idea is good. Even though I would not look forward to more paper!   

[quote=BondGuy][quote=Philo Kvetch]

[/quote]

We'll have to agree to disagree, BG. I, too, dislike the 'cookie cutter'
investment portfolios run through outside money managers. They're
generally little more than glorified mutual funds, albeit somewhat
cheaper. I maintain that the client is best served in house, provided that
he/she is philosophically aligned with the F/A insofar as investing is
concerned.[/quote]

+1

[/quote]

Not sure what you're trying to say there, Big Guy!

[quote=ManagedMoney]
I’m on the other side of the ledger on this
one.  If I was a client, I would want as many brilliant minds and
specialists working on my behalf as possible.  I see it as
intellectual diversification.
[/quote]



But in reality, too much diversification dilutes any manager specific
alpha.  And of course if its questionable if persistant manager
specific alpha exists.

[quote=ManagedMoney]

Only with clients who don’t have enough
money to buy a diversified bond portfolio would I put them into a bond
fund (or an SMA)  For almost everyone else, I have them buy bonds
outright in a standard brokerage account (no fees)[/quote]



See the recent IPO of Vanguard’s bond ETF’s makes owning single bonds
obsolete for most people. For 11bp a year, you get the entire Lehman
Aggregate in one share.



No SMA, or bond ladder is going to beat that.



If for whatever reason you must have longer maturities, you buy longer term bond ETF’s.

[quote=AllREIT]

[quote=ManagedMoney]

Only with clients who don’t have enough
money to buy a diversified bond portfolio would I put them into a bond
fund (or an SMA)  For almost everyone else, I have them buy bonds
outright in a standard brokerage account (no fees)[/quote]



See the recent IPO of Vanguard’s bond ETF’s makes owning single bonds
obsolete for most people. For 11bp a year, you get the entire Lehman
Aggregate in one share.



No SMA, or bond ladder is going to beat that.



If for whatever reason you must have longer maturities, you buy longer term bond ETF’s.




[/quote]

What about clients who want guarantees?

Exactly what guarantees of principal and interest are provided by this new ETF?

The Lehman index has already existed as an iShare for quite some time.

[quote=joedabrkr]

[quote=AllREIT]

[quote=ManagedMoney]

Only with clients who don’t have enough
money to buy a diversified bond portfolio would I put them into a bond
fund (or an SMA)  For almost everyone else, I have them buy bonds
outright in a standard brokerage account (no fees)[/quote]



See the recent IPO of Vanguard’s bond ETF’s makes owning single bonds
obsolete for most people. For 11bp a year, you get the entire Lehman
Aggregate in one share.



No SMA, or bond ladder is going to beat that.



If for whatever reason you must have longer maturities, you buy longer term bond ETF’s.




[/quote]

What about clients who want guarantees?

Exactly what guarantees of principal and interest are provided by this new ETF?
[/quote]



It’s the Lehman Aggregate of all investment grade bonds. If want TSY only ETF’s those exist as well.



While the fund itself is not guarantee’d its assets are, etc etc. Joe,  you are much too smart for this.

[quote=joedabrkr]

[quote=AllREIT]

[quote=ManagedMoney]

Only with clients who don’t have enough
money to buy a diversified bond portfolio would I put them into a bond
fund (or an SMA)  For almost everyone else, I have them buy bonds
outright in a standard brokerage account (no fees)[/quote]



See the recent IPO of Vanguard’s bond ETF’s makes owning single bonds
obsolete for most people. For 11bp a year, you get the entire Lehman
Aggregate in one share.



No SMA, or bond ladder is going to beat that.



If for whatever reason you must have longer maturities, you buy longer term bond ETF’s.




[/quote]

What about clients who want guarantees?

Exactly what guarantees of principal and interest are provided by this new ETF?
[/quote]

Exactly.  “Maturity” doesn’t exist in a bond fund.

[quote=Greenbacks]

I have been using C shares for several years now and always explain the fees just as I do with fee based accounts. Clients do not complain as long as they understand.

I think the fee disclosure idea is good. Even though I would not look forward to more paper!   

[/quote]

I utilize asset allocation C shares too, for clients with less than $50,000.  We have to present a "mutual fund disclosure form" where we explain the differences between A, B, & C shares, break points, LOI, etc.  Then the client chooses which share class they want, and sign the form.  Even when fully briefed on the fees, and how "B" converts to "A", typically clients don't want to pay an upfront load, not a backend, and choose "C". 

Then, if it's C shares, we have to present another form, "Cost Calculator".  This is a spreadsheet style form, where the prospectus expense ratios are already embedded for each share class of the fund, and you show them their hypothetical rates of return if they held the fund for "X" amount of years, and if they received "0%", "5%", or "10%" avg. return in that timeframe.  I always tell clients that given a longer time horizon, A and B shares will make them more money.  They also sign this form.

Yes, full disclosure of fees makes sure no one gets their feelings hurt, IMO.

[quote=AllREIT]

[quote=joedabrkr]

[quote=AllREIT]

[quote=ManagedMoney]

Only with clients who don’t have enough
money to buy a diversified bond portfolio would I put them into a bond
fund (or an SMA)  For almost everyone else, I have them buy bonds
outright in a standard brokerage account (no fees)[/quote]



See the recent IPO of Vanguard’s bond ETF’s makes owning single bonds
obsolete for most people. For 11bp a year, you get the entire Lehman
Aggregate in one share.



No SMA, or bond ladder is going to beat that.



If for whatever reason you must have longer maturities, you buy longer term bond ETF’s.




[/quote]

What about clients who want guarantees?

Exactly what guarantees of principal and interest are provided by this new ETF?
[/quote]



It’s the Lehman Aggregate of all investment grade bonds. If want TSY only ETF’s those exist as well.



While the fund itself is not guarantee’d its assets are, etc etc. Joe,  you are much too smart for this.





[/quote]

No sir, in this case I think to some extent you are outsmarting yourself.  Your suggestion is thought-provoking and something I think I might implement.  But-there are those clients who want specific bonds with guarantees.  Rock solid promises with a date attached.  For those types of clients, your suggestion is just not going to work.  No disrespect, just my strong opinion.

[quote=joedabrkr]
No sir, in this case I think to some extent you
are outsmarting yourself.  Your suggestion is thought-provoking
and something I think I might implement.  But-there are those
clients who want specific bonds with guarantees.  Rock solid
promises with a date attached.  For those types of clients, your
suggestion is just not going to work.  No disrespect, just my
strong opinion.
[/quote]



Joe, As I see it, the deal is this.



0. Any bond has exactly three attributes that matter, coupon rate,
credit rating, and durration. Maturity is normally not important unless
you need to defease obligations. I.e you need exact cash at a known
time in the future.



Investing for defeasance is one thing, and investing in fixed income
for cashflow and diversification is something else. If you need to
defease then performance and cost doesn’t matter vs getting the timing
right.



If you are investing for fun and profits, then you are going to have a
damn hard time beating the Lehman Aggregate on a risk adjusted basis,
unless you take on serious risks (agressive bets on interest
rates/credit) that put you far out of the benchmark.



Now some people can make these bets, and others cannot, and
survivorship bias skews what we see. I.e Bill Gross/Dan Fuss are still
around, LTCM is not.



So the conservative view is that the investment grade bond market is correctly priced, and future interest rate movements are unknowable, so a passive indexing approach is best.

[quote=AllREIT]

[quote=joedabrkr]
No sir, in this case I think to some extent you
are outsmarting yourself.  Your suggestion is thought-provoking
and something I think I might implement.  But-there are those
clients who want specific bonds with guarantees.  Rock solid
promises with a date attached.  For those types of clients, your
suggestion is just not going to work.  No disrespect, just my
strong opinion.
[/quote]



Joe, As I see it, the deal is this.



0. Any bond has exactly three attributes that matter, coupon rate,
credit rating, and durration. Maturity is normally not important unless
you need to defease obligations. I.e you need exact cash at a known
time in the future.



Investing for defeasance is one thing, and investing in fixed income
for cashflow and diversification is something else. If you need to
defease then performance and cost doesn’t matter vs getting the timing
right.



If you are investing for fun and profits, then you are going to have a
damn hard time beating the Lehman Aggregate on a risk adjusted basis,
unless you take on serious risks (agressive bets on interest
rates/credit) that put you far out of the benchmark.



Now some people can make these bets, and others cannot, and
survivorship bias skews what we see. I.e Bill Gross/Dan Fuss are still
around, LTCM is not.



So the conservative view is that the investment grade bond market is correctly priced, and future interest rate movements are unknowable, so a passive indexing approach is best.

How does owning individual issues ‘guarantee’ against interest rate risk?

[quote=Philo Kvetch]How does owning individual issues 'guarantee' against interest rate risk?[/quote]

This is going to be good. Idiots don't look too good when they go up against Philo.

If a client really doesn't like the idea of getting back less than they put in, I will use individual bonds. Otherwise, I use bond funds or ETFs.

Because with a bond, I can tell a client that the $25K bond will pay them back EXACTLY $25K on July 20, 2014, regardless of what interest rates do (if the company is still around). I can't say that with a bond fund.

I personally prefer bonds funds over individual bonds. I know it will come as a shocker, but I think Bill Gross is smarter than me.

[quote=now_indy]

If a client really doesn't like the idea of getting back less than they put in, I will use individual bonds. Otherwise, I use bond funds or ETFs.

Because with a bond, I can tell a client that the $25K bond will pay them back EXACTLY $25K on July 20, 2014, regardless of what interest rates do (if the company is still around). I can't say that with a bond fund.

I personally prefer bonds funds over individual bonds. I know it will come as a shocker, but I think Bill Gross is smarter than me.

[/quote]

That sounds like an awfully long surrender period, to me.

[quote=Philo Kvetch]How does owning individual issues ‘guarantee’ against interest rate risk?[/quote]

Guarantee is probably a poor choice of words, but they will offer some protection if interest rates decline over a period of time-as clients continue to collect the higher coupons from a specific bond.

This is a good thread, has given me some useful information and some provoctive thoughts as well.

BTW-it is not that I disagree with the idea that for most bond funds or ETF’s are better.  It’s just that some investors want GUARANTEES.

Oh-and I would dispute your point, AllREIT that only govies, agencies, and munis carry truly legit guarantees…

What about GE paper, for example?

[quote=Philo Kvetch]How does owning individual issues ‘guarantee’ against interest rate risk?[/quote]

Because even if interest rates go up, the person holding the bond will (worst case) still get all of their money back at maturity. (assuming they didn’t buy the bond at a premium)

Interest rate risk, by definition, is that if rates rise above current levels, the

current value of the paper you now hold will decline. Buying an individual

issue assumes and accepts interest rate risk.



Looks to me like you can’t differentiate between interest rate risk and

principal risk.

[quote=Philo Kvetch]Interest rate risk, by definition, is that if rates rise above current levels, the

current value of the paper you now hold will decline. Buying an individual

issue assumes and accepts interest rate risk.



Looks to me like you can’t differentiate between interest rate risk and

principal risk.













[/quote]

By owning the bond outright, your pricipal is protected against rising interest rates (interest rate risk,) because at maturity, you get all your principal back, no matter how much interest rates have risen.

With a bond fund, there is no such protection because there is no maturity date.

[quote=ManagedMoney]

[quote=Philo Kvetch]Interest rate risk, by definition, is that if rates rise

above current levels, the

current value of the paper you now hold will decline. Buying an individual

issue assumes and accepts interest rate risk.



Looks to me like you can’t differentiate between interest rate risk and

principal risk.













[/quote]By owning the bond outright, your pricipal is protected against

rising interest rates (interest rate risk,) because at maturity, you get all

your principal back, no matter how much interest rates have risen.With a

bond fund, there is no such protection because there is no maturity date.

[/quote]



What you’re describing is principal risk, not interest rate risk. Even in

your current confused state, you still haven’t shown any 'guarantees’

against interest rate risk. You’ve shown how the investor ASSUMES ALL of

the interest rate risk.

[quote=Philo Kvetch]


What you’re describing is principal risk, not interest rate risk. Even in

your current confused state, you still haven’t shown any 'guarantees’

against interest rate risk. You’ve shown how the investor ASSUMES ALL of
the interest rate risk.[/quote]



I think managedmoney, (at ML right?) needs to review his training module on fixed income.

The only thing you know with an individual security, is that it will be
redeamed at par at some time in the future, and therefore current price
will converge on par value.



Thats only important if you plan to hold a bond to maturity. Of course
if you have a bond portfolio, you rarely do that. Why? because the
durration of bond goes down as it gets closer to maturity, so if you
want to keep a portfolio with a target durration you have to roll bonds.



If managed money sells a widow a 30 year long bond and says it has no
interest rate risk, then interests go up, and it trades at 80… There will be many lawyers happy to take the case.



2. Credit risk is the risk of not getting principal/interest because the obligor defaults or refuses to pay.



If this bothers you, buy treasury bonds or else keep a very diverse
portfolio with no credit sensitive bond being more than 1% of the
portfolio. If you run a big fixed income account (i.e you are PIMCO or
an insurance company), you can also play cute tricks with bond
futures/options to greatly lower portfolio durration at fairly low cost.



Or just avoid this whole mess by using a bond fund, and explaining to the client that it may bounce around a small bit.

That is a good summary of the risks in investing bonds Allreit.  Thanks.

This is exactly why I do not offer fixed bonds at this time unless the client is very very sure that they are going to be able to accept the interest rate risk.   Those are usually my very elderly clients who just want to have a fixed income until death and buy bonds with the Death Put feature.

Most individuals don't have the funds to be able to construct a good bond portfolio.  Bond funds are where I'm at for income clients with some ETFs thrown in to juice the yield.

[quote=ManagedMoney] [quote=Philo Kvetch]Interest rate risk, by definition, is that if rates rise above current levels, the
current value of the paper you now hold will decline. Buying an individual
issue assumes and accepts interest rate risk.

Looks to me like you can't differentiate between interest rate risk and
principal risk.

[/quote]

By owning the bond outright, your pricipal is protected against rising interest rates (interest rate risk,) because at maturity, you get all your principal back, no matter how much interest rates have risen.

With a bond fund, there is no such protection because there is no maturity date.

[/quote]

In the meantime, while interest rates are rising, your client  is holding a sub par valued bond paying less interest than most bank cds are paying.  He is royally pissed at you because he can't sell his bond, unless he wants to take a principle loss, to get a higher yield.   Your client is stuck with this loser investment until rates go back up or until it matures. 

Every month he looks at his statement, sees that 10,000 bond valued at 7,000, sees that he is getting 5% and even bank cds are paying 6 to 7% and he gets mad at you all over again.   He forgets that 5% seemed like a good rate at the time. If you didn't explain the consequences to him of this and DOCUMENT that you did you are setting yourself up for a really big fall or at least a mad client who is going to tell everyone about how you screwed him

[quote=AllREIT]

If managed money sells a widow a 30 year long bond and says it has no
interest rate risk, then interests go up, and it trades at 80… There will be many lawyers happy to take the case.




Or just avoid this whole mess by using a bond fund, and explaining to the client that it may bounce around a small bit.



[/quote]

AllREIT I agree with much of what you post, and you clearly are a bright fella.

Having said that-

1.)  Anyone who sells a 30 year bond or a mortgage pass through to an 80 year old without fully educating them as to risks, and documenting the discussions, DESERVES to get hauled into arbitration.

2.)  As to your “bounce around a bit” comment, I’m guessing you’ve been fortunate enough to never have the experience of having a bond fund blow up under you.  It sucks.

As I said before, I agree with you that generally bond funds are better for most.  But specific fixed income works well for certain folks too.  Just offering a different POV.

[quote=AllREIT] [quote=Philo Kvetch]

What you're describing is principal risk, not interest rate risk. Even in
your current confused state, you still haven't shown any 'guarantees'
against interest rate risk. You've shown how the investor ASSUMES ALL of the interest rate risk.[/quote]

I think managedmoney, (at ML right?) needs to review his training module on fixed income.

1. Interest rate risk related to the possiblity of the current market value of a security going up or down due to changes in interest rates. All fixed income securities have this, and "durration" describes this sensitivity.

Floating rate securities are conceptually a series of smaller short term securities so they have very low durrations. Securities with embedded options (callable bonds, mortgages, etc) have variable durrations and are a PITA to price and value.

The only thing you know with an individual security, is that it will be redeamed at par at some time in the future, and therefore current price will converge on par value.

Thats only important if you plan to hold a bond to maturity. Of course if you have a bond portfolio, you rarely do that. Why? because the durration of bond goes down as it gets closer to maturity, so if you want to keep a portfolio with a target durration you have to roll bonds.

If managed money sells a widow a 30 year long bond and says it has no interest rate risk, then interests go up, and it trades at 80... There will be many lawyers happy to take the case.

2. Credit risk is the risk of not getting principal/interest because the obligor defaults or refuses to pay.

If this bothers you, buy treasury bonds or else keep a very diverse portfolio with no credit sensitive bond being more than 1% of the portfolio. If you run a big fixed income account (i.e you are PIMCO or an insurance company), you can also play cute tricks with bond futures/options to greatly lower portfolio durration at fairly low cost.

Or just avoid this whole mess by using a bond fund, and explaining to the client that it may bounce around a small bit.

[/quote]

No, that's still not right.  Credit Risk is the possibility that an issuer may not meet his obligations in a timely manner, or default entirely on  the service of the debt.  Principal Risk is the threat of loss of principal.  In other words, an investor may receive all interest payments in a timely manner, yet still lose his/her principal if the company cannot return the face amount of the instrument.  An investor may lose interest payments (if, for example, the company files for protection from creditors), yet still not have principal at risk.

[quote=AllREIT] [quote=Philo Kvetch]

What you're describing is principal risk, not interest rate risk. Even in
your current confused state, you still haven't shown any 'guarantees'
against interest rate risk. You've shown how the investor ASSUMES ALL of the interest rate risk.[/quote]

I think managedmoney, (at ML right?) needs to review his training module on fixed income.

1. Interest rate risk related to the possiblity of the current market value of a security going up or down due to changes in interest rates. All fixed income securities have this, and "durration" describes this sensitivity.

Floating rate securities are conceptually a series of smaller short term securities so they have very low durrations. Securities with embedded options (callable bonds, mortgages, etc) have variable durrations and are a PITA to price and value.

The only thing you know with an individual security, is that it will be redeamed at par at some time in the future, and therefore current price will converge on par value.

Thats only important if you plan to hold a bond to maturity. Of course if you have a bond portfolio, you rarely do that. Why? because the durration of bond goes down as it gets closer to maturity, so if you want to keep a portfolio with a target durration you have to roll bonds.

If managed money sells a widow a 30 year long bond and says it has no interest rate risk, then interests go up, and it trades at 80... There will be many lawyers happy to take the case.

2. Credit risk is the risk of not getting principal/interest because the obligor defaults or refuses to pay.

If this bothers you, buy treasury bonds or else keep a very diverse portfolio with no credit sensitive bond being more than 1% of the portfolio. If you run a big fixed income account (i.e you are PIMCO or an insurance company), you can also play cute tricks with bond futures/options to greatly lower portfolio durration at fairly low cost.

Or just avoid this whole mess by using a bond fund, and explaining to the client that it may bounce around a small bit.

[/quote]

You sound like a bond fund manager who manages for total return. Most people with significant bond portfolios invest for income, not total return.

Even though MM may not have stated it as well as he/she could have, that individual issues have maturity dates can be a significant safety net in a rising interest rate environment. The interest risk possibilities should be handled with the client up front. As should all the risks involved with bond funds including the FACT that it is possible that the fund may lose and not recover all or part of the client's investment.

My experience with large fixed income portfolios is that these clients tend to be in the market on a continuous basis thus building portfolios that mirror interest rates. Certainly noone wants a 4% bond in a 5% market. Generally speaking it is accepted by experienced bond buyers, with little or no whining. The flip side is having 6 or 7% bonds in a 5% market. Experienced bond buyers know it works both ways which is why they usually don't complain. Tax swaps are a handy tool to get rid of any problematic bonds we no longer wish to hold.

I use funds only for high yield munis. Outside of that, the risk, and the cost makes buying funds a nonstarter for all but the smallest investors.

As more and more advisors offer fund only solutions to high net worth investors my "buy individual bonds" solution is becoming more and more of a unique niche.

[quote=BondGuy]

You sound like a bond fund manager who manages for total return. Most people with significant bond portfolios invest for income, not total return.

Even though MM may not have stated it as well as he/she could have, that individual issues have maturity dates can be a significant safety net in a rising interest rate environment. The interest risk possibilities should be handled with the client up front. As should all the risks involved with bond funds including the FACT that it is possible that the fund may lose and not recover all or part of the client's investment.

My experience with large fixed income portfolios is that these clients tend to be in the market on a continuous basis thus building portfolios that mirror interest rates. Certainly noone wants a 4% bond in a 5% market. Generally speaking it is accepted by experienced bond buyers, with little or no whining. The flip side is having 6 or 7% bonds in a 5% market. Experienced bond buyers know it works both ways which is why they usually don't complain. Tax swaps are a handy tool to get rid of any problematic bonds we no longer wish to hold.

I use funds only for high yield munis. Outside of that, the risk, and the cost makes buying funds a nonstarter for all but the smallest investors.

As more and more advisors offer fund only solutions to high net worth investors my "buy individual bonds" solution is becoming more and more of a unique niche.

and that was because I wrongly assumed that everyone here would know that I was referring to the principal protection one gets in a rising interest rate enviroment by owning individual bonds, rather than being in a bond fund. 

You are still not getting it.  There is no principal protection in a rising interest rate environment.  Yes, the client will get their funds back when the bond matures.  However, in the meantime their principal has been severely eroded.  If the bonds have call features, in a rising interest rate environment you can bet that the bonds will not be called.  The bond you sold to your client cannot be sold without a loss.  There is no liquidity.  In some cases as I stated this isn't a problem. The client doesn't need liquidity and is satisfied with the income stream.  But you will find that most clients, even those you thought were suitable for bonds, will be screaming their heads off at you when rates go up.  Note: I don't say if.  I say when.

Apparently, the fact that it is possible that a bond fund may lose and not recover all or part of the client's investment is an issue that no one here wants to acknowledge.  It's like the big elephant in the room.

I don't think anyone is in denial that bond funds wont'/can't lose money if rates go up.  Having seen this happen over the years I can also tell you that the bond fund is more likely to recover in principal (share price) because as rates do go up they are able to gradually add new higher yielding bonds that eventually stablize the portfolio and allow the share prices to go up as more new money is invested to take advantage of the new higher yield.   An individual bond is just stuck at the lower evaluation.

I use a combination of funds, bonds (TIPS or indexed), short term bonds and ETFs.  All depending on the client's age, income needs, liquidity needs, risk tolerance....among other factors.

[quote=babbling looney]

and that was because I wrongly assumed that everyone here would know that I was referring to the principal protection one gets in a rising interest rate enviroment by owning individual bonds, rather than being in a bond fund. 

You are still not getting it.  There is no principal protection in a rising interest rate environment.  Yes, the client will get their funds back when the bond matures.  However, in the meantime their principal has been severely eroded.  If the bonds have call features, in a rising interest rate environment you can bet that the bonds will not be called.  The bond you sold to your client cannot be sold without a loss.  There is no liquidity.  In some cases as I stated this isn't a problem. The client doesn't need liquidity and is satisfied with the income stream.  But you will find that most clients, even those you thought were suitable for bonds, will be screaming their heads off at you when rates go up.  Note: I don't say if.  I say when.

Apparently, the fact that it is possible that a bond fund may lose and not recover all or part of the client's investment is an issue that no one here wants to acknowledge.  It's like the big elephant in the room.

I don't think anyone is in denial that bond funds wont'/can't lose money if rates go up.  Having seen this happen over the years I can also tell you that the bond fund is more likely to recover in principal (share price) because as rates do go up they are able to gradually add new higher yielding bonds that eventually stablize the portfolio and allow the share prices to go up as more new money is invested to take advantage of the new higher yield.   An individual bond is just stuck at the lower evaluation.

I use a combination of funds, bonds (TIPS or indexed), short term bonds and ETFs.  All depending on the client's age, income needs, liquidity needs, risk tolerance....among other factors.

[/quote]

BL, bond funds also erode in up rate environments. The primary difference being that with a fund there is a possibility that you may never get back to even. Bond fund performance and the inabilty of BF managers to recoup loses, guess correctly, and in some cases act in their sharehoders best interest, WAS graphically illustrated by the bond market collapses of 94 and 98/99. The problem was and still is that for managers to keep their jobs managers they need to perform this quarter. That short term thinking led to a lot of locked in loses by managers repositioning to improve performance going forward. Many of these managers added to the misery by guessing wrong a second time. That many bond funds that were operating in 94 have not recovered to their previous levels shows the real risk investors are taking with bond funds. The disconnect between bond fund investors, who probably wouldn't mind if it took a couple of years to get the money back, and managers whose jobs were on the line became a glaring red flag to all bond fund investors. With individual bonds the investor has full control, can take loses or hold, or buy mori. There is no conflict of interest.

Also, in your example of a client losing 30% of their investment and being locked into a bond on a rising rate market, have you ever had that happen? That's one hell of an interest rate move! In fact, I've never had it happen. We've gone to the low nineties on munis and high eighties on Ginnies but 30%? However, I understand the point you were making, just the numbers struck me as way off.

Forum Rule #1...never argue bonds with BondGuy...politics perhaps, but never bonds...

I'm not arguing bonds with Bond Guy, just discussing some of the different strategies and pointing out some pitfalls to Managed Money.

Bond Guy: my example was exagerated, but I have seen bonds take considerable dumps back the the early 90's.  And I also agree that bond funds can erode in any interest rate environment.  I guess the point is that there is nothing 100% safe and I wanted to point out the falacy that Managed Money has in his thinking that bonds are a way to protect principal. (Technically they are)  What is even worse than just interest rates rising on a bond portfolio is the double whammy of rising interest rates and downgraded credit quality  (GMAC) eeek.

Yes, you get your money back when the bond matures. So your principal is protected.  But to the client who is looking at the short term where his statement si showing his bond is down in value because interest rates went up, this is really cold comfort.   He doesn't think his principal is protected, much. 

"Well, Mr Client. Your GMAC bond that was $45,000 is now worth $32,000.  (Explanation of bond ratings and pricing to the client....again) The good news is that if it is called which could happen beginning 2 years from now or when it matures in 2019 you will get 100% of your principal back . Plus in the meantime you will still recieve your interest of 5.65% (cough cough unless the company goes belly up and they default on the whole thing cough cough)"

True story.  I thankfully didn't sell him this bond. This is the only bond he owns and represents almost all the money he has in the world. The client just doesn't understand and is worried sick. There are a lot of people out there who bought this stuff from Jones brokers who were just selling the rate and didn't explain the risks.  Jones never explained the risks to the newbie brokers either.  Never sell the rate.

Most clients don't have sufficient funds to construct a really good bond ladder and don't have the additional funds or guts to buy more when the bonds have gone down in value.  You and I understand how this works.   Most clients don't.   It's our job to manage the expectations and risk levels that the clients have by choosing a variety of investments and strategies.

BL…that wasn’t necessarily directed at you…just a general acknowledgement that just about all of us can learn much on bonds from BG.  The placement of my comment admittedly made it appear directed at you, but it’s no more at you than it is at me.

Wasn’t it Peter Lynch that said “Never, never, never buy a bond fund”? Well, I’m not exactly of that mind, but very close to it.

[quote=babbling looney]

Most individuals don’t have the funds to be
able to construct a good bond portfolio.  Bond funds are where I’m
at for income clients with some ETFs thrown in to juice the yield.

[quote=babbling looney]

I’m not arguing bonds with Bond Guy, just discussing some of the different strategies and pointing out some pitfalls to Managed Money.

Bond Guy: my example was exagerated, but I have seen bonds take considerable dumps back the the early 90's.  And I also agree that bond funds can erode in any interest rate environment.  I guess the point is that there is nothing 100% safe and I wanted to point out the falacy that Managed Money has in his thinking that bonds are a way to protect principal. (Technically they are)  What is even worse than just interest rates rising on a bond portfolio is the double whammy of rising interest rates and downgraded credit quality  (GMAC) eeek.

Yes, you get your money back when the bond matures. So your principal is protected.  But to the client who is looking at the short term where his statement si showing his bond is down in value because interest rates went up, this is really cold comfort.   He doesn't think his principal is protected, much. 

[quote=joedabrkr]
2.)  As to your "bounce around a bit"
comment, I’m guessing you’ve been fortunate enough to never have the
experience of having a bond fund blow up under you.  It sucks.
[/quote]



I was being a bit extreme with the 30y bond, but I wanted a good
example of interest rate risk. That bond is only risk free after 30
years.



Other than extreme interest rate conditions (i.e mid 1970s --> early 1980s == The carter years ) I would be hard pressed to think of how a fairly short Treasury portfolio can blow up on you.



OTH, fixed rate mortgages can really blow up on you thanks to negative convexity. (I.e people keep and do not prepay low rate mortgages )



So after getting past negative convexity and overly long durrations (i.e therefore TLT is useless for investment purposes) the main way to get a blow up is reaching for yield by compromising on credit quality.



Sort of like the story of Icarus.

[quote=Starka]No, that’s still not right.  Credit Risk is the
possibility that an issuer may not meet his obligations in a timely
manner, or default entirely on  the service of the debt. 
Principal Risk is the threat of loss of principal.  In other
words, an investor may receive all interest payments in a timely
manner, yet still lose his/her principal if the company cannot return
the face amount of the instrument.  An investor may lose interest
payments (if, for example, the company files for protection from
creditors), yet still not have principal at risk.[/quote]



ARYTS? IA?



"not meet his obligations in a timely manner, or default entirely on  the service of the debt."



Which is exactly the same as not paying principal and interest when it is due.



All the bad stuff that can happen when obligors default on timely
payment of interest or principal go under the heading of credit risk.



If a company files for “protection from creditors” aka Chapter 11 Bankruptcy, your principal is very much risk. If you don’t believe me, I have stacks of Enron and WorldCom bonds at fabulous prices.

[quote=AllREIT] [quote=Starka]No, that’s still not right. Credit Risk is

the

possibility that an issuer may not meet his obligations in a timely

manner, or default entirely on the service of the debt.

Principal Risk is the threat of loss of principal. In other

words, an investor may receive all interest payments in a timely

manner, yet still lose his/her principal if the company cannot return

the face amount of the instrument. An investor may lose interest

payments (if, for example, the company files for protection from

creditors), yet still not have principal at risk.[/quote]



ARYTS? IA?



"not meet his obligations in a timely manner, or default entirely on the

service of the debt."



Which is exactly the same as not paying principal and interest when it is

due.



All the bad stuff that can happen when obligors default on timely

payment of interest or principal go under the heading of credit risk.



If a company files for “protection from creditors” aka Chapter 11 Bankruptcy, your principal is very much

risk. If you don’t believe me, I have stacks of Enron and

WorldCom bonds at fabulous prices.

[/quote]



Only if you’ll sell me an equal amount of Delta Airlines obligations at the

same prices.



Get it Ace?

[quote=babbling looney]Apparently, the fact that it is possible
that a bond fund may lose and not recover all or part of the client’s
investment is an issue that no one here wants to acknowledge. 
It’s like the big elephant in the room.

I don't think anyone is in denial that bond funds wont'/can't lose money if rates go up.  Having seen this happen over the years I can also tell you that the bond fund is more likely to recover in principal (share price) because as rates do go up they are able to gradually add new higher yielding bonds that eventually stablize the portfolio and allow the share prices to go up as more new money is invested to take advantage of the new higher yield.   An individual bond is just stuck at the lower evaluation.[/quote]

Any actively run bond ladder (a constant durration portfolio), in a sloped yeild curve enviroment will eventually converge on par value over time. The portfolio manager will let the sub-market bonds mature at par, while buying longer-than-benchmark bonds thus keeping portfolio duration the same.

Bond portfolios are in a constant state of converging to par, after being dislocated from interest rate shocks.

Again, Babs is right. If you keep telling clients that single bonds are free from interest rate risk, you will eventually be facing the wrong end of an ACAT form or a plaintiffs attorney.

[quote=BondGuy]

BL, bond funds also erode in up rate
environments. The primary difference being that with a fund there is a
possibility that you may never get back to even. Bond fund performance
and the inabilty of BF managers to recoup loses, guess correctly, and
in some cases act in their sharehoders best interest, WAS graphically
illustrated by the bond market collapses of 94 and 98/99. The
problem was and still is that for managers to keep their jobs
managers they need to perform this quarter. That short term thinking led
to a lot of locked in loses by managers repositioning to improve
performance going forward. Many of these managers added to the misery
by guessing wrong a second time.

[QUOTE]

Which is an example of why active management of bond portfolios (other than replicate an index) is harmless at best (alpha == expenses) or very harmful at worst. BND at 11bp, looks better every day.

Meanwhile, I can rely on the AGG to passivly roll off the bonds when they have less than a year to go (i.e near par), and buy new fresh bonds (at par) over time, thus causing the whole portfolio to be in a constant state of convergence.

This is all great stuff, but at the end of the day I will take a healthy dose of Bill Gross, John Brynjohlfson, Dan Fuss, and Margie Patel for a little high yield. I cant imagine ever getting to the point where I would either have the knowledge to run money like these people, or have the time and/or inclination to do so.

Call me simple but I would rather outsource that particular piece and keep on moving...

[quote=mikebutler222]Wasn't it Peter Lynch that said "Never, never, never buy a bond fund"? Well, I'm not exactly of that mind, but very close to it.[/quote]

I don't know if Peter Lynch said it but I saw Michael Rosen within days of selling the Rochester Funds to Oppie say to a room of Mutual Fund Producers "If you buy a Bond fund and hold on to it forever, you are an idiot!"

Granted, he then went on to pitch his "Bond Fund for Growth" which was a convert fund that was one of the tops in the category at the time.

For myself. HARD FAST rules in this business don't make sense. I buy where the deal is the best and then I watch in case I need to sell.

I'll buy CEBFswhen they're discounted and paying more than the long bonds. I'll sell them when I think it's time to too.

Personally, not a fan of Open Bond funds. I buy many individual bonds (not as many as some, but, still).

I'll buy Preferreds when the time is right too (I would say never at a premium, but then, there are times when they're undervalued and so...)

Ron Fielding of the Rochester Funds at Oppenheimer, as WHOMIT had mentioned, is another guy who I would trust 100% with my money as well as my clients.

[quote=blarmston]

This is all great stuff, but at the end of the day I will take a healthy dose of Bill Gross, John Brynjohlfson, Dan Fuss, and Margie Patel for a little high yield. I cant imagine ever getting to the point where I would either have the knowledge to run money like these people, or have the time and/or inclination to do so.

Call me simple but I would rather outsource that particular piece and keep on moving...

Ahhhh !!! Oh well, I never liked her cooking anyway… Too much salt and she was always forcing me to have an extra helping… Pretty rude if you ask me…

[quote=blarmston]Ron Fielding of the Rochester Funds at Oppenheimer, as WHOMIT had mentioned, is another guy who I would trust 100% with my money as well as my clients.[/quote]

+1 on Fielding.

ORNAX is managed for income not total return. This is exactly the same way most muni buyers manage their portfolios. This is important because you won't find him selling high income bonds to sure up a poor quarter. Fielding does a credit analysis and if the bond passes he buys it. One of the coolest things he does is buy very small blocks.

Does anyone here still do campaigns? A campaign is where you pick a product and do a major push to sell as much of it as possible. I realize this involves actual selling, but campaigns are real month makers. If someone wanted to find a good product to either prospect with or to campaign, ORNAX and it's C share version are good products to use.  

[quote=AllREIT] [quote=BondGuy]

BL, bond funds also erode in up rate environments. The primary difference being that with a fund there is a possibility that you may never get back to even. Bond fund performance and the inabilty of BF managers to recoup loses, guess correctly, and in some cases act in their sharehoders best interest, WAS graphically illustrated by the bond market collapses of 94 and 98/99. The problem was and still is that for managers to keep their jobs managers they need to perform this quarter. That short term thinking led to a lot of locked in loses by managers repositioning to improve performance going forward. Many of these managers added to the misery by guessing wrong a second time.

[QUOTE]

Which is an example of why active management of bond portfolios (other than replicate an index) is harmless at best (alpha == expenses) or very harmful at worst. BND at 11bp, looks better every day.

Meanwhile, I can rely on the AGG to passivly roll off the bonds when they have less than a year to go (i.e near par), and buy new fresh bonds (at par) over time, thus causing the whole portfolio to be in a constant state of convergence.

[/quote]

All, were in the business in 94?

[quote=BondGuy][quote=AllREIT] [quote=BondGuy]

BL, bond funds also erode in up rate environments. The primary difference being that with a fund there is a possibility that you may never get back to even. Bond fund performance and the inabilty of BF managers to recoup loses, guess correctly, and in some cases act in their sharehoders best interest, WAS graphically illustrated by the bond market collapses of 94 and 98/99. The problem was and still is that for managers to keep their jobs managers they need to perform this quarter. That short term thinking led to a lot of locked in loses by managers repositioning to improve performance going forward. Many of these managers added to the misery by guessing wrong a second time.

[QUOTE]

Which is an example of why active management of bond portfolios (other than replicate an index) is harmless at best (alpha == expenses) or very harmful at worst. BND at 11bp, looks better every day.

Meanwhile, I can rely on the AGG to passivly roll off the bonds when they have less than a year to go (i.e near par), and buy new fresh bonds (at par) over time, thus causing the whole portfolio to be in a constant state of convergence.

[/quote]

All, were in the business in 94?

[/quote]

Ops, let's try this again.

AllREIT, were YOU in the business in 94?

[quote=BondGuy]

All, were in the business in 94?

I loved 1994!

I had the misfortune to have loaded up on the Eaton Vance "b" share muni fund in the years leading up to '94 (I guess 91 92 and 93, but I can't be possitive) and then at the end of the year the IRS decided that EV's method of taking the fees out of capital gains and not out of income was UnIRStional (EV was, if I was informed correctly, the first company to come out with a B share Muni fund product and by taking the fees out of cap gains, they were able to have a high current income).

I also had a passal of closed ended muni funds. Both fund groups were on dividend reinvest.

I had the greatest time calling clients and telling them "Mr. Jones, we put $50,000 into this fund initially, the market value today is $75,000 and we are going to take a $15,000 loss by selling it!

"Not only that, Mr. Jones, but we are going to use the money to buy these individual bonds with a 6% coupon, trading at 80 to give us a 7.5% tax free current income, which is higher than we are getting on the bond fund, and when the bond matures it will be worth more than the bond fund was at it's top!"

That the bond market turned around in 95 and the bonds were trading near par within that year was just icing on the cake!

It was one of those moves that cemented me in the minds of clients as a guy who knew something about the markets (whether they were right or not is immaterial).

[quote=AllREIT] [quote=BondGuy]

All, were in the business in 94?

[/quote]

Nope, were you there in 1931?
[/quote]

I asked, because your posts are filled with logic. They struck me as written by someone who has never seen a real bear market, or worse, in the bond market. That's not to say that everything you've written isn't valid, or won't work when the bear comes our way. I hope it does work for you and your clients.

As for 1931, not around for that one. For that reason I'm an avid Alfred Cowles fan.

[quote=BondGuy][quote=AllREIT] [quote=BondGuy]

All, were in the business in 94?

[/quote]

Nope, were you there in 1931?
[/quote]

I asked, because your posts are filled with logic. They struck me as written by someone who has never seen a real bear market, or worse, in the bond market. That's not to say that everything you've written isn't valid, or won't work when the bear comes our way. I hope it does work for you and your clients.

As for 1931, not around for that one. For that reason I'm an avid Alfred Cowles fan.

[quote=AllREIT] [quote=BondGuy][quote=AllREIT] [quote=BondGuy]

All, were in the business in 94?

[/quote]

Nope, were you there in 1931?
[/quote]

I asked, because your posts are filled with logic. They struck me as written by someone who has never seen a real bear market, or worse, in the bond market. That's not to say that everything you've written isn't valid, or won't work when the bear comes our way. I hope it does work for you and your clients.

As for 1931, not around for that one. For that reason I'm an avid Alfred Cowles fan.

[/quote]

There's a good chart on the Alliaz/PIMCO site "Understanding Bond Market cycles", since the start of the AGG in the mid 1970s there has never been a rolling 3 year period with a negative total return. This is consistant with how passive bond ladders always coverge to par, even after extreme interest rate shocks.

This also supports Bill Gross's style of trying to be more effecient than the benchmark vs making grand thematic bets.
[/quote]

All good stuff in a balanced portfolio kind of way. I'm not poo pooing your what you're saying here, but when we invest for income we're not trying to beat an index benchmark.  For income buyers the benchmark is much easier to grasp, highest yield for the risk taken always wins.

We're not measuring our income portfolios against a market index. Our benchmark is the client's ability to attain their lifestyle goals. The problem with funds and prof mgrs like Gross, who I respect a great deal, is that they live quarter to quarter. What's in a manager's best interest is not always in the client's best interest. The professional's mind set is always focused on short term total return. And as much as clients might like to, they can't spend total return. A total return that I might add, in the short term is often meaningless. GM comes to mind as do loses in market value( not principal) cause by the down leg of an interest rate cycle and then recovered in the up leg. Gross and company are held accountable for their performance through those cycles. Meanwhile back on mainstreet their shareholders suffer when their income is reduced by a risk adverse mgr shortening up maturities for whatever reason.

[quote=BondGuy]

All good stuff in a balanced portfolio kind of way. I’m not poo pooing your what you’re saying here, but when we invest for income we’re not trying to beat an index benchmark.  For income buyers the benchmark is much easier to grasp, highest yield for the risk taken always wins.

We're not measuring our income portfolios against a market index. Our benchmark is the client's ability to attain their lifestyle goals. The problem with funds and prof mgrs like Gross, who I respect a great deal, is that they live quarter to quarter. What's in a manager's best interest is not always in the client's best interest. The professional's mind set is always focused on short term total return. And as much as clients might like to, they can't spend total return. A total return that I might add, in the short term is often meaningless. GM comes to mind as do loses in market value( not principal) cause by the down leg of an interest rate cycle and then recovered in the up leg. Gross and company are held accountable for their performance through those cycles. Meanwhile back on mainstreet their shareholders suffer when their income is reduced by a risk adverse mgr shortening up maturities for whatever reason.

[quote=ManagedMoney] [quote=BondGuy]

All good stuff in a balanced portfolio kind of way. I’m not poo pooing your what you’re saying here, but when we invest for income we’re not trying to beat an index benchmark.  For income buyers the benchmark is much easier to grasp, highest yield for the risk taken always wins.

We're not measuring our income portfolios against a market index. Our benchmark is the client's ability to attain their lifestyle goals. The problem with funds and prof mgrs like Gross, who I respect a great deal, is that they live quarter to quarter. What's in a manager's best interest is not always in the client's best interest. The professional's mind set is always focused on short term total return. And as much as clients might like to, they can't spend total return. A total return that I might add, in the short term is often meaningless. GM comes to mind as do loses in market value( not principal) cause by the down leg of an interest rate cycle and then recovered in the up leg. Gross and company are held accountable for their performance through those cycles. Meanwhile back on mainstreet their shareholders suffer when their income is reduced by a risk adverse mgr shortening up maturities for whatever reason.

[/quote]

I'm with you on this one.

If a client came to me looking for return, I wouldn't put them in bonds in the first place.  I put them in bonds when they tell me they require, and need to count on, x amount of dollars of income every month.  So, the focus (of this part of the portfolio) is on the income they receive, not the return they are getting.
[/quote]

Well, for portfolio balancing purposes bonds can play a role as a non correlating asset. Which, not to put words in his mouth, is what AllREIT is talking about.

I totally agree on your point when it comes to generating income. When it comes to bonds you are, within the call and redemption features of that bond, delivering an income that the client can count on. Not so with funds where the income can and does change on a regular basis.

"Gross and company are held accountable for their performance through those cycles. Meanwhile back on mainstreet their shareholders suffer when their income is reduced by a risk adverse mgr shortening up maturities for whatever reason."

That is a great point. Although deep down I may have been aware of that dynamic, it makes absolute sense when conveyed like that.

Well, I learned something new today, so I am going to go take a power nap under my desk. 

[quote=blarmston]

Well, I learned something new today, so I am going to go take a power nap under my desk. 

[/quote]

If you were a bigshot at ML, you wouldn't have to nap hidden away under your desk. You'd simply throw your feet onto the top of your desk and lean back in your chair!

Good point- give me a couple years... I already have the office and the leater couch picked out...

But I prefer stretching out, kicking the Allen Ed's off, busting out the couch pillow I brought from home, and throwing on some chillout house and catching 30 minutes of peacefull bliss...

Its great- my director used to F- with me but now he really doesnt say anything...

[quote=BondGuy]

…

I totally agree on your point when it comes to generating income. When it comes to bonds you are, within the call and redemption features of that bond, delivering an income that the client can count on. Not so with funds where the income can and does change on a regular basis.

Am I wrong or is thread suppose to be about 12b-1 fees or your egos?

Isnt it always about egos to some degree???

[quote=Greenbacks]

Am I wrong or is thread suppose to be about 12b-1 fees or your egos?

[/quote]

Oh yeah, 12b-1 fees.

Here's the plan:

Let's have any regulator who wants to do away with 12b-1 fees become an intern for a week. I vote that they intern in any office for the week before April 15th. After pulling their hair out with phone calls from cost basis seeking accountants for a week let'em tell us that we and the MFunds don't earn every dime of that fee.

[quote=BondGuy][quote=Greenbacks]

Am I wrong or is thread suppose to be about 12b-1 fees or your egos?

[/quote]

Oh yeah, 12b-1 fees.

Here's the plan:

Let's have any regulator who wants to do away with 12b-1 fees become an intern for a week. I vote that they intern in any office for the week before April 15th. After pulling their hair out with phone calls from cost basis seeking accountants for a week let'em tell us that we and the MFunds don't earn every dime of that fee.