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Looking to invest in bonds, where do you start? Luckily Morningstar have come to the rescue. Eric Jacobson, senior fund analyst for Morningstar, has come up with a list of five red flags to look for in a potential fund.
Anyone of these things is enough to raise a red flag, find all five and you might want to look elsewhere. I won’t summarize the full list, you can check that out for yourself here.
But I will mention the most important factor.
Beware of big yield.
Yield is a snapshot of how much income a fund is paying out on an annualized percentage basis, relative to its net assets. So at first glance a high yield is a good thing. But beware, high yield also means high risk.
“There’s a strong correlation between how much yield funds have offered and how poorly they’ve performed during times of market stress.” Says Jacobson. “For example, funds with higher yields at the end of 2007 suffered meaningfully worse than low-yielding funds during the 2008 market meltdown.”
So the lesson here is don’t get greedy and invest in a fund that invests most of its assets under management in Venezuelan government bonds. As with any investment you should look under the hood of any fund and find out where its actually investing and weigh up the risks accordingly.
You can check out the other four tips here!
Todays Other Top Stories
Forbes: – Puerto rico leads the way in investor protection. – We have been blogging about Puerto Rican municipal bonds over the last several weeks. The situation for mom and pop investors and retirees in Puerto Rico is dire, to say the least.
The Winchester: – Vote set on bond issue for nursing home. – The Clark County Fiscal Court will vote on a second reading today of an ordinance that would allow them to act as the municipal fiscal agent issuing $10 million in bonds to Lexington’s Sayre Christian Village Nursing Home Inc., funded by Central Bank.
Bloomberg: – Tax-exempt market shrinking for longest since 1945. – The $3.7 trillion municipal market is poised to shrink for a fourth straight year, the longest stretch in almost seven decades, underscoring localities’ reluctance to borrow for crumbling infrastructure.
Focus on Funds: – Investors fleeing muni funds? Not the passive ones. – Morningstar’s Candice Lee has the details on this year’s persistent municipal-bond fund outflows — or, more precisely, outflows from actively managed muni funds.
MuniNetGuide: – State and local public pension plans: Is the crisis over – or has it just begun? – Very few state and local public pension plans have earned bragging rights for their performance over the past year, and others have climbed deeper into the danger zone. Overall, state and local pension funds saw little improvement during the 2012 fiscal year, according to the Eleventh Annual Pension Review released this week by Loop Capital Markets.
Learn Bonds: – Upside down world: I bonds pay a higher fixed rate than EE bonds. – There are two possible arguments that could be made for buying EE bonds instead of I Bonds. If inflation is negative, the I Bond could pay zero percent interest in subsequent 6 month periods of time after purchase. When CPI-U is negative, CPI-U is deducted from the fixed component to calculate the total interest rate for I Bonds, with a floor of zero percent. It’s a remote possibility that in the future, the total interest rate on I bonds could be 0.0%. For EE bonds to be the better buy, inflation would have to be negative for a decade if not longer.
Income Investing: – Treasuries maybe bubblier than stocks, junk bonds. – Amid the latest round of bubble talk, UBS this week takes a look at relative risk between stocks and Treasuries and says you shouldn’t call one a bubble based on how it compares to the other right now.
Reuters: – Prices edge up slightly to start holiday-shortened week. – Prices for U.S. Treasuries edged up slightly on Monday as housing data proved weaker than expected, kicking off a holiday-shortened week with a relatively light slate of economic data.
Income Investing: – With taper looming, junk bonds still looking good. – Corporate bonds have been doing well amid all the taper discussion. RBS says says corporate bond valuations generally don’t look bubbly, and investors should overweight high-yield bonds versus their high-grade counterparts.
HighYieldBond.com: – leveraged loans vs. high yield bonds. – After spiking in June – amid talk of tapering in the Fed’s bond buying program – yields on double B rated leveraged loans and high yield bonds have thinned. As of Nov. 21 the average BB new-issue yield was 3.78% for leveraged loans and 5.63% for high yield bonds.
Barron’s: – Gundlach – Best bond bet is dollar-denominated EM debt. – Jeff Gundlach talks to Jack Otter about finding value in bond sectors. His favorite right now? Dollar-denominated emerging-market bonds.
Funds Europe: – Emerging markets safe despite bond vigilantes. – “Bond vigilantes” are likely to cause volatility in Treasury yields despite the efforts of the US Federal Reserve to prepare the markets for tapering – but emerging markets probably won’t be hit so hard this time around.
Morningstar: – Emerging markets equity commentary – October 2013. – Emerging market equity prices saw sustained gains in October as investor optimism improved and most markets saw healthy investment inflows. Concerns about tapering of bond purchases by the U.S. Federal Reserve eased further as the two week U.S. government shutdown in October was widely expected to have restricted economic activity.
NerdWallet: – One of the best asset classes you’ve never heard of. – If you are concerned about the stock market that is reaching all time highs and bond yields, that although higher versus a year ago, are still very low where do you go to invest? This is the same question we have been asking for all our clients. To be sure, virtually every client will retain significant exposure to select stocks and bonds depending on their risk tolerance and goals but recent valuations and yields have pushed us to look into alternative investments.
Cranky: – Sorry guys, stocks are not bonds. – There have been many articles on Seeking Alpha that suggest investors should simply replace their bonds with stocks. Or that investors should simply ignore risk altogether and sell their bonds. There have been articles that suggest investors should not hold bonds at all. Once again, without any mention to risk or risk tolerance levels. Just who should hold zero bonds?
TWST: – Bonds under pressure. – Stock prices closed at new highs once again last week. The S&P 500 added another 0.4 percent, increasing its gain for the year to 26.5 percent. There is little to say about this rally that hasn’t already been said. So the focus here will be on bonds, which are dramatically underperforming as the cost of credit climbs.
Governing: – City bonds still a good investment despite slow market. – A meager growth environment could have issuers tapering their borrowing, but local governments are still expected to be a stable investment.
What Investment: – Diversify, and don’t give up on the U.S. for bond market returns. – US government debt with longer maturities represents value for investors seeking bond market returns, according to Anthony Gillham, manager of Old Mutual’s Skandia Strategic Bond Fund.
FT: – Bond market puts Fed anchor to test. – It is a strategy the Federal Reserve has embraced. The US central bank is stressing that it is in no hurry to raise overnight interest rates. By doing so, it hopes to limit the rise in long term bond yields ahead of any decision to pare back its $85bn a month of emergency bond purchases, dubbed quantitative easing.
Deseret News: – Allocations to bonds are not all created the same. – Investors cite a wide range of overall strategies motivating the allocation to bonds in their investment portfolios. A very common allocation observed in investment portfolios with longer-term return objectives and also desiring a moderate degree of market volatility exposure contains approximately 40 percent bonds and the balance in some variety of equity strategies.
I'm in 100% agreement with PIMCO w/r/t to fed funds going forward… hmmmm
— David Schawel (@DavidSchawel) November 26, 2013
Good, not great, demand at today's 5yr auction but enough to give bonds support today.
— AnthonyValeri (@Anthony_Valeri) November 26, 2013