Know Why You Own Bonds, Stay the Course, and Control What You Can Control
MILWAUKEE, February 7, 2014
As investors weigh the balance of 2014 with legitimate questions about what to do with their bond holdings, Baird’s Mary Ellen Stanek reiterated her longstanding advice to bond investors: “Know why you own bonds and recognize that, while it may get a little choppy, bonds serve a key role in most portfolios.”
Stanek, Director of Asset Management at Baird, oversees more than $20 billion in assets in institutional accounts and the Baird Funds and is Chief Investment Officer of Baird Advisors, the group’s bond asset management arm. Stanek acknowledges investors are in unchartered waters as the Fed continues to taper their bond buying programs. “The Fed has never tapered before and the range of potential outcomes remains very wide. However, most investors allocate to bonds to provide diversification, generate income, and provide a smoothing effect for their portfolio. If long term goals haven’t changed, then we encourage investors to stay the course and keep an eye on their long-term objectives. While investors may consider adjusting bond allocations, we strongly discourage them from abandoning them.”
Stanek offers the following advice to help weather any potential bond market volatility:
- Control what you can control. Investors have the ability to control a number of aspects of their bond portfolio. “Minimize the enemies to your wealth which includes the cost to invest and taxes. Keep an eye on expenses and trading costs. Organize your assets in the most tax efficient manner putting less tax-efficient investments in tax-sheltered accounts.”
- Stick with short to intermediate duration, high quality bonds. Use a steep yield curve to your advantage. “The Fed has pledged to keep short term interest rates low and we believe short-term rates will stay low, even when the Fed begins tapering. But longer rates are likely to inch up. Investors can take advantage of a steep yield curve by taking advantage of roll down which can potentially add to the total return.
- Stay disciplined and use time to your advantage. “It is time not timing. Spreading your purchases over time using dollar cost averaging means you buy more when prices decline. This can have a powerful long-term effect.”
- Avoid investing on headlines. “Investors who focus on current headlines, not their long-term strategy, tend to lose relative to long-term disciplined investors.”
- If your risk tolerance or risk profile changes, some investors may choose to flex-down their bond exposure by choosing short or intermediate duration alternatives. “The challenge for most investors, though, is getting back in.”
Stanek is encouraged by a steep yield curve. “Steeper yield curves are generally a sign of an improving economy. While rising rates can have a short-term negative impact on total return, the long run impact is a higher yield and reinvestment rate on your portfolio. As bond investors, we look forward to returning to a time when bond yields are more in line with historical norms.”
Baird Advisors has always taken a duration neutral approach when managing bond portfolios. This means the duration of each portfolio is matched to the relevant index. While some managers shorten their average duration to reduce the impact of rising rates, Baird Advisors does not try to predict rates given the fairly low probability for active bond managers of getting the timing right. Instead the team tries to add value and control risk through careful issue selection, sector allocation and yield curve positioning.
About Mary Ellen Stanek, CFA
Mary Ellen Stanek, CFA, has 34 years of investment management experience. She currently serves as Managing Director and Director of Asset Management for Robert W. Baird & Co. and Chief Investment Officer of Baird Advisors. Additionally she serves as President of the Baird Funds. Previously she had served as President and CEO of Firstar Investment Research & Management Company (FIRMCO).
Stanek is responsible for the development and portfolio management of all proprietary asset management services. She co-manages several fixed income mutual funds as well as a number of taxable and tax-exempt portfolios.
Baird is an employee-owned, international wealth management, capital markets, private equity and asset management firm with offices in the United States, Europe and Asia. Established in 1919, Baird has more than 2,900 associates serving the needs of individual, corporate, institutional and municipal clients. Baird has more than $100 billion in client assets. Committed to being a great place to work, Baird ranked No. 14 on FORTUNE’s 100 Best Companies to Work For in 2013 – its tenth consecutive year on the list. Baird’s principal operating subsidiaries are Robert W. Baird & Co. in the United States and Robert W. Baird Group Ltd. in Europe. Baird also has an operating subsidiary in Asia supporting Baird’s investment banking and private equity operations. For more information, please visit Baird’s Web site at rwbaird.com.
Dollar cost averaging and diversification do not ensure a profit or protect against loss. All investments carry some level of risk and may not be suitable for all investors. It is important that an investor is familiar with the inverse relationship between a bond’s price and its yield. Bond prices will fall as interest rates rise and vice versa. Risks of investing in fixed income securities include changes in interest rates, liquidity, credit quality, volatility and duration.