Bonds are boring. We know. We believe that if used correctly, the bonds making up the core part of your bond portfolio are supposed to be boring. If someone tells you there is some "exciting" news about your bonds, that's probably not a good thing.
At Kovitz, bonds are not an afterthought in the way they may be at other investment management and planning firms. Corporate, municipal, federal government, and mortgage-backed bonds comprise a significant portion of the assets we manage.
We tailor portfolios of individual bonds in separately managed accounts to our clients' specific duration, credit quality, liquidity, and tax parameters. Combining our commitment to understanding and managing to each client's particular circumstances, with our appreciation of the nuances inherent in the bond markets, allows us to seek meaningfully additional yield without accepting undue risk.
- In a portfolio for which liquidity may not be a high priority, we can consider non-agency mortgage-backed securities.
- For a client who is not subject to the alternative minimum tax, we can add higher yielding private activity bonds to a municipal bond portfolio.
- For a client who is indifferent as to whether a bond matures in one calendar year or the next, it might make sense to buy a bond with a short call window, where we would be willing to take short maturity extension risk in exchange for meaningfully higher yield.
In each of these cases (and many other similar situations), we are willing to devote the resources to understand our clients' situations and take advantage of what the market will provide to earn higher yields, while refusing to compromise credit quality or appropriate duration.
In constructing our clients' municipal bond portfolios, our goal is to take advantage of the "odd lot discount," which is often a competitive advantage for our fixed income clients. We will patiently bid on smaller bond lots available from unaffiliated third party dealers in order to purchase at lower prices. This works like a "reverse volume discount" as there is typically little institutional demand for smaller bond lots. Large banks and brokerage firms generally prefer to buy $1 million (or larger) bond lots into their own inventories and divide them among a number of clients, usually at a marked up price. We are willing to devote the time to bid for our clients on these smaller pieces with the goal of providing them the bonds at the price we paid, and passing the higher yield onto them.
At Kovitz, we do not buy bonds into our inventory for later sale to our own clients at a marked up price. Many banks and brokerage firms sell bonds to clients from their own inventories. They are essentially taking the other (sell) side of the transaction. At Kovitz, the prices that we pay for bonds are the prices that you pay for the bond, and we purchase the bonds with your particular needs and circumstances in mind.
Finally, Kovitz does not custody your bonds. Our clients' assets are held at third party custodians (primarily Pershing, LLC, a division of the Bank of New York-Mellon). Separation of custody from management is a key internal control that we believe all clients should look for when hiring an investment advisor.