How EP Wealth Selects Bonds

A Conversation with EP Wealth Advisors Director of Portfolio Strategy - Adam Phillips, CFA^®, CFP^®

Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA^®), a CERTIFIED FINANCIAL PLANNER™ (CFP^®), and has been included on the Forbes Next Gen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.

Analysis is More Challenging When You're Buying Bonds

Unlike the stock market, the bond market is not as transparent as we’d like. Stocks, particularly of large-cap companies, are traded in huge numbers of shares every day. Price information is easy to come by as a result. Unlike stocks, many bonds can go days or even weeks without trading.

How are Bonds Priced?

Also unlike stocks, buying bonds in smaller lot sizes—for example ten bonds—can cause you to take a pretty big price hit compared with what you might pay if you were purchasing a lot size of fifty or a hundred bonds. This is why when we construct a bond portfolio, we ensure it’s large enough to buy these larger lot sizes while also investing in enough different bonds to provide diversification.

Information is Key in Bond Pricing

Because larger institutional companies often can get better prices on bonds, we use a number of tools to help level the playing field. Resources such as Bloomberg provide trade-order history on individual bonds. Investing directly through electronic trading platforms lets us see what different dealers are offering—often, they’re offering the same bond at very different prices. Because we can see the markup they’re making, we can negotiate to add bonds to our clients’ portfolios at lower cost.

The Two Ways to Assess Yield

Investors typically gravitate to bonds because they want income and safety. But the two different ways of maximizing yield each carry risks of their own.

Term Length

Longer-term bonds normally offer higher rates than shorter-term bonds. But they’re also subject to the threat of rising interest rates, which cause the price the bond trades at to decline.

Credit Quality

Lower-rated bonds with less credit quality also pay higher rates. But this is because of their greater risk of default. In maximizing yield on behalf of our clients, we focus first and foremost on credit risk. When we buy a bond, we look at its credit rating, as well as its rating history and any potential actions that may affect it. A bond that looks good now might be facing a potential downgrade by one of the major ratings agencies. Credit quality is where research can reveal red flags that may prove costly.

How Can You Benefit from a Strategic Approach to Investing?

With a staff of professionals and access to sophisticated analytical tools, EP Wealth offers a comprehensive range of services to help you invest with greater insight, as well as develop a holistic wealth management strategy. To discuss your finances and investment goals, we invite you to contact one of our advisors.

This is #11 in the Informed Investor “How to Build Your Investment Portfolio” series. Other topics include Asset Allocation, Why We Diversify, How to Buy a Stock, The Types of Investment Risk, Concentrated Positions, etc. For more information on our investment process, check out our investment management page or ask for a Portfolio Review.

Disclosures:

• EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented in this report. EPWA has used its best efforts to verify the data referenced. The information presented was obtained from sources deemed to be reliable. However, EPWA cannot guarantee the accuracy or completeness of the information offered. All expressions of opinion are of the presenter and are subject to change without notice.
• Past performance is not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or strategy, or product made reference to directly or indirectly, will be profitable or equal to past performance levels. Future financial conditions and events can never be accurately predicted. No analysis, plan, or report has the ability to accurately predict the future.
• Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions with the appropriate professional(s). Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice. Always consult a professional Financial Advisor before implementing or applying any of the approaches or strategies made referenced to directly or indirectly here.
• Any direct or indirect references to investment allocation, specific securities, security sectors, or any investment vehicle(s) should not be taken as a recommendation or solicitation to buy or sell a particular security or invest in any specific investment strategy. There is no guarantee that any of the information or investment strategies discussed will be suitable or profitable.
• Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There can be no assurances that a portfolio will match or exceed any particular benchmark.
• Hiring a qualified advisor and/or diversifying your portfolio do not guarantee investment success, and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any results, projections, or other information being represented in this presentation will be met or sustained.
• All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions, may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio. There is also no assurance that a portfolio will match or outperform any particular benchmark.
• EP Wealth Advisors, LLC is a registered investment adviser with the U.S. Securities and Exchange Commission (“SEC”). Registration with the SEC does not constitute an endorsement by the SEC, nor does it imply that EP Wealth Advisors Inc. has attained a certain level of skill or ability.