馃攳
Odd-Lot Bonds: Interview with Dan Wiener and Jen Zebniak - YouTube
Channel: unknown
[0]
(bright music)
[6]
<v Dan>Hello, this is Dan Wiener,</v>
[7]
chairman and co-founder of Adviser Investments,
[10]
with another of our Adviser You Can Talk To podcasts.
[13]
Today as my guest,
[14]
I've got Jen Zebniak,
[16]
who's a member of our research team
[17]
who works closely with our fixed income manager Chris Keith
[20]
and helps build portfolios of individual bonds
[24]
for investors with particularly large allocations to bonds
[27]
or those who have special needs.
[30]
Jen, I wanted to speak with you specifically
[33]
about a particular subset of the bond market
[35]
that you and Chris have focused on for many of our clients.
[39]
You call them odd-lot bonds.
[41]
Can you tell me a bit about what these are
[43]
and why you're interested in them?
[46]
<v Jen>Sure, yeah.</v>
[47]
So odd-lot bonds are just smaller-size positions,
[50]
such as maybe $10, $15, $20,000 increments.
[54]
They're more effective in an individual investor's portfolio
[57]
than an institutional-size fund.
[59]
Institutional-size funds
[61]
would normally buy bigger positions,
[62]
like, in the millions.
[64]
<v Dan>So the positions you're buying, though,</v>
[67]
are of bond issues that are quite small.
[71]
Is that right?
[72]
I mean, when you say $10 or $15 million,
[73]
that's the total size of the issue itself.
[76]
<v Jen>So that would be the size of a deal itself,</v>
[79]
but you can buy a smaller position size.
[82]
Increments go down to,
[84]
for taxable bonds.
[85]
Usually you can buy in increments of $5,000.
[88]
Sometimes it can be as low as $1 or $2,000
[90]
depending upon the issue.
[92]
<v Dan>Right, so you might buy $5,000 worth</v>
[95]
of a $5 or $6 million or $10 million deal.
[98]
<v Jen>Yes. Correct.</v>
[99]
<v Dan>And the pension funds,</v>
[100]
the mutual funds have no interest in these.
[102]
<v Jen>The smaller positions, no,</v>
[104]
they wouldn't have much interest.
[105]
If you have a fund that's a billion dollars
[108]
and you buy a $15,000 piece,
[110]
it's not going to move the needle much,
[112]
whereas if you have an individual investor
[114]
with a portfolio of, say, half a million dollars
[118]
and you buy a $15,000 piece,
[120]
it's going to move the needle much more
[121]
and mean much more to that individual person.
[123]
<v Dan>Now, a pension fund could buy the entire issue,</v>
[127]
couldn't it?
[128]
<v Jen>Yeah, they could.</v>
[129]
<v Dan>They could buy a $5 or $10 million position</v>
[132]
and own the whole thing.
[133]
<v Jen>Yeah.</v>
[133]
<v Dan>Why wouldn't they do that?</v>
[135]
<v Jen>So, they could.</v>
[137]
A pension fund would if they had the money
[140]
and it's something that they were interested in.
[142]
But sometimes they can sell off pieces of it,
[145]
or if a new issue, second market,
[148]
you will find these smaller positions.
[150]
It all just depends.
[152]
<v Dan>And what's the appeal, then,</v>
[154]
for an individual investor
[157]
in buying an odd-lot bond?
[159]
<v Jen>The appeal would be</v>
[160]
that they can oftentimes get more yield,
[163]
and that's obviously more beneficial to the investor.
[166]
It's more income for them in their pocket.
[169]
<v Dan>Um-hum.</v>
[169]
So the appeal of these to the small investor
[174]
is that you've got more yield
[176]
and that the issuer is providing that yield
[180]
because the big fish don't want to bite.
[182]
<v Jen>So it's not that the big fish don't want to bite.</v>
[185]
It's that in order for these large institutions
[189]
to sell these smaller size odd-lot bonds,
[192]
they offer more yield so that smaller,
[196]
like, investors that need smaller pieces
[198]
in order to be meaningful to them
[200]
will want to pick them up
[201]
and the big institutions can get them
[202]
off of their books quicker.
[205]
If they are sitting on their books for much longer
[207]
and the market moves,
[208]
they could end up losing money.
[210]
So sometimes it's just so that they can move them quicker.
[213]
<v Dan>Are we talking primarily, then, corporate bonds,</v>
[218]
or are we talking about muni bonds?
[221]
<v Jen>It could be both.</v>
[222]
You can find odd-lot bonds in corporates
[224]
and munis.
[224]
<v Dan>Um-hum.</v>
[225]
And are these buy and hold until maturity type bonds
[230]
for the individual investor,
[231]
or is it the kind of bond that you and Chris trade around?
[235]
<v Jen>So for our clients,</v>
[237]
we don't tend to trade around.
[238]
When we invest in a bond,
[239]
we tend to hold,
[241]
the intent is to hold it to maturity.
[242]
There are times when we would sell,
[244]
and the two times I can think of are
[247]
if we invest in an investment-grade bond
[249]
and then the credit quality deteriorates quickly,
[251]
we will review the position and sell
[253]
if we feel it's necessary.
[255]
Or if a client requests money
[258]
and we don't have cash on hand,
[259]
then we'll sell a bond, as well.
[260]
<v Dan>Okay.</v>
[261]
Well, that's a need-driven selling, isn't it?
[264]
<v Jen>Yes.</v>
[264]
<v Dan>Okay.</v>
[267]
Since we're talking about selling,
[269]
trading bonds is,
[270]
it's not like trading stocks, right?
[272]
We, you can't just look up a price
[275]
on your personal computer,
[279]
you know, pop it up on your iPhone...
[281]
<v Jen>So...</v>
[282]
<v Dan>...and see what's,</v>
[282]
what the price of a bond is.
[284]
<v Jen>No, not really.</v>
[285]
I mean, a lot of it is relationship-making.
[288]
We do have an electronic platform that we can use.
[290]
That's more of the science of it.
[292]
But the art part would be the relationships
[294]
that we form with these dealers,
[296]
and it just makes it easier
[297]
to be able to negotiate with them.
[299]
If we see they have a bond at a certain yield,
[301]
we're able to call them up and say,
[303]
hey, we see a similar piece
[306]
just a little bit cheaper,
[307]
like, what can you do for me?
[309]
And sometimes they'll come back
[310]
and give us a better price,
[311]
and it helps us add value.
[313]
<v Dan>And the flip side, of course,</v>
[316]
is if it's a cheaper price,
[318]
it typically is a little higher yield, right?
[320]
<v Jen>Yes. Yeah.</v>
[320]
The inverse relationship.
[321]
<v Dan>I mean, this is the inverse of price and yield</v>
[324]
that I think a lot of individual investors
[327]
don't always pick up on.
[329]
<v Jen>Yes.</v>
[330]
<v Dan>And it's my understanding</v>
[333]
that when you're working with the dealers
[336]
who actually have these bonds in their possession,
[340]
everything is fungible, right?
[342]
There is no set price,
[343]
and that's why it's hard to just see it
[345]
on the screen of your bond site.
[347]
<v Jen>Yeah, so, I mean,</v>
[348]
we look at a lot of different things, too,
[351]
in order to make sure we are getting a fair price,
[352]
and dealing with someone directly
[355]
versus just an electronic platform
[357]
helps us to make sure we are getting
[358]
the best price possible.
[359]
<v Dan>So how do you do that?</v>
[360]
Do you have multiple dealers
[362]
that you're playing off of one another, or...
[364]
<v Jen>Yeah,</v>
[365]
I would say we have upwards of 30 different dealers
[366]
that we do have relationships with.
[368]
Some we use more than others.
[369]
But it does depend on who can offer us the best price.
[374]
<v Dan>In buying individual bonds,</v>
[377]
what's the difference between that and, say,
[381]
an investor going out and buying a bond mutual fund
[383]
or a bond ETF?
[386]
<v Jen>I would say one of the biggest differences</v>
[387]
is when an investor owns an individual bond,
[390]
that has a set maturity date,
[392]
and at that maturity date,
[394]
they get their principle back,
[395]
whereas with a bond fund or an ETF,
[398]
the investor themselves,
[400]
if they want that money back,
[401]
they have to go in and sell the shares
[403]
in order to get their money,
[404]
and with an individual bond,
[406]
it happens automatically.
[407]
<v Dan>And you are selling at the market.</v>
[409]
You don't know what the price is
[411]
until the day you go and sell.
[412]
<v Jen>Correct. Yes.</v>
[413]
And you know what you're getting back
[415]
with an individual bond.
[416]
<v Dan>Great, great.</v>
[418]
What is the, what are the risks, then,
[420]
of owning an individual bond versus, say, a bond fund?
[426]
<v Jen>Well, the risk of default,</v>
[427]
which is why we focus on buying investment-grade bonds.
[431]
We buy anything rated A or higher
[433]
at the time we invest.
[435]
<v Dan>Right.</v>
[435]
Whereas a fund typically has a very broad-based portfolio.
[439]
<v Jen>Yeah.</v>
[440]
<v Dan>Even a default or two or seven</v>
[441]
in a big diversified portfolio
[444]
is probably not going to move the needle much
[447]
for the individual investor.
[448]
<v Jen>Correct. Yeah.</v>
[449]
<v Dan>All right, well, I want to thank you, Jen,</v>
[451]
for joining me today.
[452]
This is Dan Wiener.
[453]
I'm the chairman and co-founder of Adviser Investments,
[456]
and I've been speaking with Jen Zebniak,
[459]
who's a member of our research team
[460]
and works on building portfolios
[463]
of individual bonds for our clients.
[466]
<v Jen>Thanks, Dan.</v>
[467]
(bright music)
Most Recent Videos:
You can go back to the homepage right here: Homepage