Sponsored by

Most advisors agree that building bond portfolios with individual bonds instead of mutual funds or ETFs can be beneficial for high-net-worth individuals and families looking for a more sophisticated cash flow approach. Fixed income scales can be an excellent tool to satisfy the individualized needs of those investors by providing a structured framework for portfolio construction. But because of the complex array of options and the institutional nature of the bond market, advisors find it difficult and time-consuming to construct bond portfolios using individual bonds. Perhaps even more time-consuming is monitoring and updating a leveraged bond portfolio, especially if one advisor oversees many of them. So what if advisors could handle scales faster and with greater accuracy, while also creating more efficient scales and being able to update them more cost-effectively?

Technology now makes this possible.

Just as direct or custom indexing has become more prevalent in equity investing, a new wave of technology-enabled innovation has reached the fixed income world enabling the creation of what is effectively a personalized personal index for an individual investor in the form of a scaled index. bond portfolio. At our firm, this takes the form of asset class-specific investments that combine the potential benefits of passive investing, which can result in lower costs, with the portfolio customization features of managed accounts. Our objectives are to improve after-tax and risk-adjusted results, seeking a predictable income stream and low sensitivity to rising interest rates.

This new approach to scaling bond portfolios isn't the fixed-income version of “robo” investing. Algorithms are not replacing advisors or bond market experts. Rather, as an outsourced service, they are empowering advisors to deliver better performing and more efficient portfolios. Instead of algorithms generating blanket allocations for everyone, the new approach enables advisers to customize the strategy by reflecting their clients' preferences, whether that includes credit quality considerations, concentration issues, different maturity ranges or anything else, such as residency factors when investing in municipal bonds.

Customization is possible because creating the models and working behind the scenes is a team of portfolio managers and quantitative analysts whose full-time job is to create and monitor client portfolios. Our team, for example, engages in ongoing research into the economics and performance of fixed income markets, and incorporates their findings as well as the latest research from others into their work. Based on thorough research and client requirements and preferences determined by advisors, our team can adjust models to meet advisor and client needs.

For advisors and their clients, increasing the efficiency of the technology-enhanced portfolio creation process, overseen by portfolio specialists, is our traders' ability to access a broad network of bond traders. With the lack of liquidity a hallmark of so many fixed income markets, having dedicated traders and portfolio managers who are able to quickly and efficiently obtain the best combination of price and liquidity from multiple traders , adds to our ability to meet fixed income client objectives and targets.

Finally, there is the issue of costs. While there are no easily identifiable or distributed costs associated with building and managing home bond ladders, the process takes time. Since most advisory firms have a rough idea of ​​what an hour of an advisor's time is worth, it's clear that in-house portfolio building isn't “free” and, in fact, is often expensive—not to mention multi-use. alternative of the advisor's time that would be much more productive.

Outsourcing fixed income portfolio construction carries an obvious cost, of course, but that's probably lower than the true cost of an advisor or team running the process in-house. Offsetting this cost, however, are the opportunity for higher portfolio returns and yields, as well as the potential value of portfolio growth that comes from more efficient portfolio construction and the likelihood of better trade execution.

Given the potential advantages that can come from advisory practices, investment performance and client satisfaction, it may be time to take a closer look at a more technology-enhanced way of building fixed income portfolios .

_{The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this section is intended to constitute legal, tax, accounting, securities or investment advice, nor an opinion regarding the suitability of any investment, nor a solicitation of any kind. Intended for investment professionals only.}

_{Nothing contained herein is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the suitability of any investment, nor a solicitation of any kind. Investing carries certain risks and there is no assurance that investing in accordance with the portfolios or strategies mentioned will provide positive performance over any period of time. Investors may lose money if they invest in accordance with the portfolios or strategies discussed herein. Past performance is not indicative of future results.}