Bond ladders used to be a snap. Advisors could set them up and spend little time to keep them running. But when bond yields dropped low enough to generate negative returns in some cases, assessing bond products became more difficult. Suddenly ladders began to look risky.
“They are more difficult today,” says Delia Fernandez, a fee-only planner in Los Alamitos, Calif.
According to Chad Jones, vice president of fixed income sales and service at Schwab, “Now you have to ask if you are buying safe bonds. It gets really complex when you have to understand the different products that go into the ladder.”
Realizing that advisors needed help with ladders, Schwab decided to offer an automatic bond ladder investment, composed entirely of PIMCO municipal bonds. It’s Schwab’s first fully managed discretionary service built around laddering. Though offered through Schwab, PIMCO manages the assets.
A year and a half after it was introduced, advisors have put more than $1 billion into it, with minimum client investments starting at $250,000.
When buying bonds today, advisors need to know if they are buying bonds at a fair price and whether or not those bonds are liquid. They also need to understand the over-the-counter municipal bond market to buy in this class.
“If you have an expert like PIMCO do that for you then all you have to do is think whether or not a bond ladder is the right strategy for you,” Jones says.
And if you know your bond strategy is safe, then some investors think ladders can offer new protections in a more volatile marketplace.
“We see a lot of people laddering, probably more in the last year or so because they are realizing how difficult it is to time interest rates,” Jones says. Even if income is not your primary objective, he adds, laddering is a good way to smooth out the effects of rising or falling interest rates by continually reinvesting at the highest prevailing rate for bonds of that credit quality.
Jones also thinks more investors are choosing to ladder out of an expectation that interest rates and yields are likely to increase.
The service is offered with six different portfolios. Three are for California residents and composed entirely of that state’s municipal bonds. The others have a national focus.
The ladders are offered in six-, eight- and 12-year configurations at costs starting at 35 basis points. Investors can choose whether to allow their appreciation to accumulate in cash or to be reinvested. No more than 10% of any single client’s invested assets go into the same bond. Once a selection is made then, Jones says there is nothing for either the client or the advisor to do aside from letting PIMCO get to work making the first investments over the next several weeks.
Before launching the service, Schwab wasn’t entirely confident how it would do, Jones says.
“We had nervousness that maybe the bond market was too quiet for this to catch on,” he says, “but it certainly has resonated.”
–Ann Marsh writes for Financial Planning.
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