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SUNDAY BUSINESS GUARDIAN www.guardian.co.tt NOVEMBER 1 • 2015
Bonds aren't boring anymore.For decades, bond
funds delivered not only decent income but also
steadier returns than stocks. Now investors fear
that the great run is over and a great bust is on
the way. Bond yields are ultralow and set to jump
higher, the thinking goes, and rising rates mean
lower bond prices.
To make matters worse, fund managers are also finding it tougher
to find buyers when they want to sell bonds. That has investors
heading for the exits. They pulled more than US$8 billion out of
bond mutual funds and exchange-traded funds in September,
according to Morningstar.
Elaine Stokes says these fears may be overdone. She is a portfolio
manager at the US$19.7 billion Loomis Sayles Bond fund, which
invests in everything from Treasurys to high-yield bonds issued
by companies with weak credit ratings to Canadian debt. She spoke
recently about how investors should view their bond funds. The
interview has been edited for length and clarity.
Should we even think of bond funds as income-generating
investments anymore? Or are they now just steadying
anchors for our portfolios when stocks are shaky?
Let's face it, there is not a lot of return in this environment. But
there isn't inflation either. So your money goes a little bit further
when there isn't inflation.
I think any portfolio should have an anchor that provides that
income generation. And the income that's available to us today is
better than it was a year and a couple months ago, because risk
is being priced a little more appropriately. So if you can get that
three to six per cent, I think that's attractive for the average investor.
But to get six per cent, you have to buy riskier things, like
high-yield bonds or foreign bonds, right?
You have to get riskier, yeah. That would be high-yield and non-
And if someone s looking at their bond fund as an anchor,
should they really be in those riskier things?
If you're buying US Treasurys at one to two per cent, and interest
rates rise, you're not going to make any money. But if you're adding
in some diversified, well-researched risk, you will have a positive
The Loomis Sayles Bond fund can hold as much as 35 per
cent of its portfolio in junk bonds. Are you close to that?
We're pretty close to that. It's been a really interesting environment,
because the baby got thrown out with the bathwater. With the
falling price of oil last year, and metals this year, it feels like there's
been a significant amount of panic in the high-yield market. When
bond funds are having withdrawals, and they can't sell or don't
want to sell the oil bond or the metals and mining bond, they're
forced to sell what's liquid, and that brings all prices down.
You brought up liquidity. There s been a lot of consternation
about how much tougher it is to find buyers for some bonds.
Liquidity absolutely stinks. That said, it's not a new phenomenon.
I find it fascinating how much it's being talked about, liquidity
today, when we've been dealing with these markets since 2008,
2009. I was more worried about liquidity then. Now that we've
had time to figure it out, adjust our portfolios and have a better
sense of how to operate in these environments, it's less worrisome
So it s not any more difficult to find a buyer for a bond
today than a few years ago?
It really depends on the day and the bond. That's just the reality
of it. There isn't a market for every bond every day. But for the
vast majority of the portfolio, there absolutely is a market.
Do you see it being a non-event when the Fed does finally
raise rates that first quarter of a percent, given how long
everyone s been anticipating it?
That's what it feels like. I don't think anything in this environment
can be a complete non-event. There are just so many participants
in the market. But give it 24 hours, and it becomes a non-event.
Because what's a quarter of a per cent? It's not going to derail
the US economy. We're still at historically low interest rates. A
quarter of a per cent is not a big deal. It's more about the pace
(of increases) than it is about the actual level.
So, as long as the Fed s rate hikes are slow and gradual,
everything s fine?
Exactly. That's the perfect environment.
Any misconceptions you see in the market right now?
The amount of panic over not so much happening seems a little
unfounded. The amount of panic about liquidity. Everyone needs
to calm down a little bit. This environment is not so dire. My
biggest fear, the thing that keeps me up at night, is that the panic
becomes self-fulfilling. AP's STAN CHOE
Here are a few of the scariest ones that are keeping
financial advisors up at night.
More money going out than coming in
"My net take-home pay is $6,000 per month, but
my expenses are $7,000 per month." Without a
budget and a keen awareness of your monthly cash
flow, how can you expect to live within your means?
To set yourself up for success, create a monthly
budget, reduce unnecessary spending, automate your
savings and regularly monitor your progress to ensure
more money is coming in than is going out.
According to the Voya Retire Ready Index, which
measures the retirement readiness levels of Americans
who are either working or recently retired, only 31
per cent of workers and 35 per cent of retirees have
a comprehensive budget. That means roughly two-
thirds of us have some basic budgeting work to do.
Credit card abuse
Many households are carrying five-figure credit
card balances and are paying double-digit interest
rates on their debt. When your bank savings account
is paying you 0.1 per cent in annual interest, yet you
are paying 15 per cent in interest to your credit card
company, it's easy to see that's a major problem for
To avoid this predicament and reign in your debt,
you should only be charging on your credit card what
you can afford to pay off, on time and in full each
month. This way, instead of those high-interest pay-
ments going towards your credit card company, they
may be directed towards savings and helping achieve
your financial goals.
We recommend starting today and putting together
an automated savings program, where investors are
saving first and spending second.
No written financial plan
According to the Voya Retire Ready Index, 17 per
cent of workers and 26 per cent of retirees have a
written financial plan. That means more than 80
percent of workers and roughly three-quarters of
retirees are simply hoping to achieve their financial
goals without any kind of roadmap, purpose or formal
plan. This is tantamount to getting in your car and
attempting to drive to your destination without an
address, map or navigation.
Driving aimlessly around town without knowing
where you are going seems foolhardy, yet people do
this with their finances all the time. Instead, set your-
self up for success and give yourself a financial GPS
by getting organised, defining and prioritising your
goals and objectives and creating your formal financial
We often fear the most what we don't know or
understand. When thinking about these scary financial
behaviours, they can all be addressed with the guid-
ance and the experience of a financial planner to
help you make informed decisions. US News
Loomis Sayles' Elaine
Stokes on bond fears
Fund manager Q&A:
portfolio manager at
Loomis Sayles Bond fund
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