Shaky Stock Market Put Low-Risk Corporate Bonds In Play For Investors

Published in
Columbus Business First (6/25/10)
Shaky Stock Market Put Low-Risk Corporate Bonds In Play For Investors
By Robert Celaschi

Corporate bonds may not have the sex appeal of a hot stock, but investors who held them during the market meltdown of 2009 took comfort in their predictable performance.

The bonds are considered to be low risk and as long as the company issuing them stays healthy, the investor can expect to at least get back the principal investment, plus regular interest payments.

“The bonds have seniority over all the other debt the company has issued,” said Brad Fisher, president of Fisher Wealth Management LLC in Columbus.

Bondholders are the first ones to be paid off. Holders of preferred stock come next, then common stock.

Greg Smith, chief investment officer at Capital Asset Management Inc. in Columbus, puts investment-grade corporate bonds in the same risk category as intermediate to long-term government bonds, investment-grade mortgage-backed bonds and tax-free municipal bonds.

“In normal conditions, these moderate classes of bonds should be priced to offer an after-tax return at least slightly better than expected inflation, but not much better,” he said.

Even junk bonds – “high yield” is the polite term – can be a viable part of a portfolio, advisers say, though Smith cautioned against having more than 20 percent of a bond portfolio in junk bonds.

“I think there are more people interested in corporate bonds today than there were two or three years ago,” said Randy Gerber, principal at Gerber Financial Advisors LLC in Worthington. Often they are people frustrated with low interest rates on money market accounts, but apprehensive about the stock market, he said.

Gauging risk

Baby boomers are part of the mix. The rule of thumb has long been to shift a portfolio’s balance toward less risky investments as a person gets older, especially as they get into retirement age.

“As you need to begin producing income off your portfolio, you need to start owning bonds,” Gerber said.

Fisher also uses corporate bonds for small-business owners and entrepreneurs. The idea is that they already have enough risk by virtue of how they earn a living.

“One of the key strategies we use with corporate bonds is to allow them to earn interest,” Fisher said.

Then the investor can invest the interest into something more aggressive.

“Therefore, we can leverage it and still get steady growth over time,” Fisher said.

A big difference between corporate and government bonds is taxability. A lot of investors overlook that, said Clint Edgington, president of Beacon Hill Investment Advisory in Columbus. He used the example of a million-dollar portfolio, with half in a taxable account and half in a tax-deferred individual retirement account.

“In that situation, we would pay particular attention to where those assets are located,” he said. “Bonds rain taxable income, so let’s put that rainy bond where we have the umbrella. What we could do quite easily is put the corporate bonds in the retirement account.”

Another factor is whether the investor buys individual bonds or a fund.

“The nice thing about buying individual bonds, you’ve got a certain cash flow. That’s more difficult with funds,” Edgington said. They also don’t come with fund management fees. But it takes some serious investing to make it work

“Once you get below about $100,000 of fixed income, it’s tough to get an efficient portfolio together with individual bonds,” he said. Liquidity is part of the problem. A General Electric bond is fairly liquid, but bonds of small, obscure companies aren’t.

“The less often something changes hands, the transaction costs go up,” Edgington said.