Why typical bond funds are like cable TV packages

Even in the current low-yield environment, I think it is important to dedicate some portion of a portfolio to bonds. However, when I look under the hood of most bond funds, the closest thing I can compare it to is a cable TV package.

Most cable companies bundle their TV packages together and split the revenue among the various channels provided within the package. For most consumers, the end result is they pay for a bunch of content that they will never use. While I personally don’t watch a lot of TV, I do occasionally like to watch some sports shows on ESPN.

In order to gain access to this channel, I would have to upgrade to a package that includes an additional 30 channels. Unfortunately, the industry does not allow me to simply purchase what is best for me as a consumer without including a bunch of things that I have no interest in. I’m stuck buying a bunch of things that I don’t want just to get the one thing I do.

What does that have to do with bonds? When you look at a bond fund, try to think of it in the same way. You are purchasing a “bundle” that includes a bunch of individual bonds. While they may provide the benefit of diversification, they also include a bunch of bonds that many investors would not want to purchase by themselves.

The fund may have purchased bonds years ago that were a great deal at the time, but you wouldn’t purchase the same bonds today. This is why I believe that investors with enough assets to diversify with individual bonds can get better results by using our disciplined institutional approach to building a portfolio.

Rather than buying a package of bonds that includes some bonds I would buy today and a lot of bonds I wouldn’t, I believe that investors are much better off purchasing bonds based on their own personal circumstances. This way, we can include only bonds that we want without having to get stuck with bonds that we don’t.

So imagine if I could just purchase the channels that my family and I like without having to pay for the channels that I don’t. Just like I think a change in this model would benefit consumers (at the expense of the provider), I believe that the same concept holds true for bond investors.

By building each of our clients a customized fixed income portfolio based on their income needs and personal circumstances, we are stripping away all of the “bundled” bonds that they would never buy if given the choice not to. While this takes much more time, expertise, and effort to do, I believe it is something that my clients deserve. Feel free to give us a call at 877-554-8150 to schedule a no-cost, no-obligation review of your current strategy and learn how our institutional discipline can benefit you.

Stephen Thomas
Senior Financial Advisor and Managing Principal
Linden Thomas and Company

This post has been provided for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Investing involves risk including the possible loss of principal. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. Diversification does not guarantee profit or protect against loss in declining markets. Since each person’s situation is different you should review your specific investment objectives, risk tolerance, and liquidity needs with your financial professional before selecting a suitable savings or investment strategy.

Investments in fixed-income securities are subject to market, interest rate, credit, and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and/or principal. This risk is heightened in lower rated bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Mutual funds are subject to risks, including loss of principal. Investment returns may fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost.

Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member of SIPC, a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Linden Thomas and Company is a separate entity from WFAFN.

Past performance is no guarantee of future results. Investing involves risk including loss of principal.
Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Linden Thomas and Company is a separate entity from WFAFN.