Morningstar Advisor - Winter 2008 - 81

Bond Fix Back to Bond School Lawrence Jones This is the first of a regular column on fixedincome topics. The idea for this column came to me shortly after a September meeting with AllianceBernstein chairman and CEO Lewis Sanders, who visited Morningstar’s offices in Chicago with a small team of fixed-income specialists to brief my colleagues and I on some major changes the firm proposed making to its bond fund lineup. AllianceBernstein, they announced, planned a broad reorganization that included fund mergers, broadening investment mandates, name changes, new share classes, and expense ratio caps. An example of the changes is the recently approved merger of the High Yield AHYAX and Corporate Bond CBFAX funds into the Emerging Market Debt AGDAX fund. That resulting fund will be renamed AllianceBernstein High Income. It will have a broad investment mandate to accommodate a new multisector approach: The fund will hold investment-grade and junk-rated corporate debt, emerging-markets bonds, and sovereigns, including nondollar-denominated issues. Also, the firm will roll out new retirement and advisor share classes of the fund and will cap its expense ratio at 95 basis points, a reasonable levy for a front-load offering that will likely end up falling into Morningstar’s emerging-markets bond category. As dramatic as these changes were, what intrigued me the most was the rationale Sanders and his team gave for making them. Their reasoning got me thinking about how advisors think about and use fixed-income funds. The team extensively researched advisors’ knowledge of, attitudes toward, and confidence in working with fixed-income offerings. Through surveys, focus groups, and interviews involving thousands of advisors, they discovered that advisors’ experiences with fixedincome investments varied widely, but many admitted to lacking confidence in their ability to add value for clients in the area. For example, one AllianceBernstein survey of a 1,000 advisors (which also included follow-up interviews with 300 respondents) found that only 38% of the cohort believed they understood fixed-income markets “very well or well,” leaving a large majority admitting a lesser level of competence. When asked to assign themselves a letter grade on their ability to use fixed-income offerings for client portfolios, 59% gave themselves a C, D, or F. Moreover, in a separate survey of 1,500 advisors (focusing on the municipal-bond markets), only 27% of respondents correctly identified “duration” as a measure of interest-rate risk, despite many in the survey suggesting that they had a high level of knowledge of the market. (It isn’t uncommon to see a divergence between self-stated knowledge and actually demonstrated knowledge.) In fact, more of those surveyed mistook duration to be a measure of credit risk. Along similar lines, Hartford Investments surveyed clients of advisors and found that investors in general believed that their advisors knew less about fixed-income investing than they did about equities. I mention these figures not to underestimate all advisors, but clearly, if the results of these surveys are representative of the wider advisor community, there is a need to help some advisors understand various facets of the fixed-income marketplace, which can help them serve and communicate better with clients. AllianceBernstein’s solution to this problem has been the streamlining of its lineup into stability, core, and high-income categories, each representing added risk along a spectrum, which is the way many advisors and investors perceive the role of fixed-income, according to the firm. Moreover, the funds will embrace a moreglobal orientation and will take advantage of the diversification that can come from a more multisector-based mandate. This simplified approach may well make sense for many investors, because the confusion that sometimes accompanies fixed-income fund selection can lead to poor decision making. The AllianceBernstein team pointed out that Morningstar itself divided the fixed-income universe (both taxable and tax-exempt) into 30 categories, a good deal to keep up with, to be sure. Our solution, inspired by the same need for information and education, begins in the form of this column, which will try to address a variety of issues, such as these among others: r How to better achieve portfolio diversifica- tion with fixed income. r How to best structure clients’ bond fund portfolios, both in and prior to retirement. r How to generate adequate income for retirement, without taking outsized risks. Most of all, in introducing the column, I’d like to appeal to your needs, interests, and concerns; what is it about fixed-income fund investing that you’d most like to know about. Please feel free to e-mail me at lawrence.jones@morningstar.com, and we’ll help navigate the sometimes complex world of fixed-income investing. K Lawrence Jones is a mutual fund analyst with Morningstar. MorningstarAdvisor.com 81
http://MorningstarAdvisor.com

Morningstar Advisor - Winter 2008

Table of Contents for the Digital Edition of Morningstar Advisor - Winter 2008

Morningstar Advisor - Winter 2008
Contents
Letter from the Editor
Inbox
How Do You Use the Morningstar Style Box?
Real Estate Investing Goes Global
The Golden Touch
Investment Briefs
Learning to Fly with Equity Options
Another Block in Building a Portfolio
In a League of Their Own
Unlock the Box
Fashion Change
The View from the Investment Side
Unpredictable Style
Weighting the Fundamentals
Wire-to-Wire Consistency
The Secret's Out
Focus on Financials
Strongest Homebuilders Will Withstand the Wrecking Ball
Breaking Style Conventions
Playing It Safe with Financials
Back to Bond School
Mutual Fund Analyst Picks
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar
The Style Counsel
Morningstar Advisor - Winter 2008 - Intro
Morningstar Advisor - Winter 2008 - Morningstar Advisor - Winter 2008
Morningstar Advisor - Winter 2008 - Cover2
Morningstar Advisor - Winter 2008 - 1
Morningstar Advisor - Winter 2008 - 2
Morningstar Advisor - Winter 2008 - Contents
Morningstar Advisor - Winter 2008 - 4
Morningstar Advisor - Winter 2008 - 5
Morningstar Advisor - Winter 2008 - 6
Morningstar Advisor - Winter 2008 - Letter from the Editor
Morningstar Advisor - Winter 2008 - 8
Morningstar Advisor - Winter 2008 - Inbox
Morningstar Advisor - Winter 2008 - How Do You Use the Morningstar Style Box?
Morningstar Advisor - Winter 2008 - 11
Morningstar Advisor - Winter 2008 - Real Estate Investing Goes Global
Morningstar Advisor - Winter 2008 - 13
Morningstar Advisor - Winter 2008 - 14
Morningstar Advisor - Winter 2008 - The Golden Touch
Morningstar Advisor - Winter 2008 - 16
Morningstar Advisor - Winter 2008 - 17
Morningstar Advisor - Winter 2008 - Investment Briefs
Morningstar Advisor - Winter 2008 - 19
Morningstar Advisor - Winter 2008 - 20
Morningstar Advisor - Winter 2008 - 21
Morningstar Advisor - Winter 2008 - Learning to Fly with Equity Options
Morningstar Advisor - Winter 2008 - 23
Morningstar Advisor - Winter 2008 - 24
Morningstar Advisor - Winter 2008 - 25
Morningstar Advisor - Winter 2008 - Another Block in Building a Portfolio
Morningstar Advisor - Winter 2008 - 27
Morningstar Advisor - Winter 2008 - 28
Morningstar Advisor - Winter 2008 - 29
Morningstar Advisor - Winter 2008 - In a League of Their Own
Morningstar Advisor - Winter 2008 - 31
Morningstar Advisor - Winter 2008 - 32
Morningstar Advisor - Winter 2008 - 33
Morningstar Advisor - Winter 2008 - 34
Morningstar Advisor - Winter 2008 - 35
Morningstar Advisor - Winter 2008 - Unlock the Box
Morningstar Advisor - Winter 2008 - 37
Morningstar Advisor - Winter 2008 - 38
Morningstar Advisor - Winter 2008 - 39
Morningstar Advisor - Winter 2008 - Fashion Change
Morningstar Advisor - Winter 2008 - 41
Morningstar Advisor - Winter 2008 - 42
Morningstar Advisor - Winter 2008 - 43
Morningstar Advisor - Winter 2008 - The View from the Investment Side
Morningstar Advisor - Winter 2008 - 45
Morningstar Advisor - Winter 2008 - 46
Morningstar Advisor - Winter 2008 - 47
Morningstar Advisor - Winter 2008 - 48
Morningstar Advisor - Winter 2008 - 49
Morningstar Advisor - Winter 2008 - 50
Morningstar Advisor - Winter 2008 - 51
Morningstar Advisor - Winter 2008 - Unpredictable Style
Morningstar Advisor - Winter 2008 - 53
Morningstar Advisor - Winter 2008 - Weighting the Fundamentals
Morningstar Advisor - Winter 2008 - 55
Morningstar Advisor - Winter 2008 - 56
Morningstar Advisor - Winter 2008 - 57
Morningstar Advisor - Winter 2008 - 58
Morningstar Advisor - Winter 2008 - 59
Morningstar Advisor - Winter 2008 - 60
Morningstar Advisor - Winter 2008 - 61
Morningstar Advisor - Winter 2008 - Wire-to-Wire Consistency
Morningstar Advisor - Winter 2008 - 63
Morningstar Advisor - Winter 2008 - 64
Morningstar Advisor - Winter 2008 - 65
Morningstar Advisor - Winter 2008 - The Secret's Out
Morningstar Advisor - Winter 2008 - 67
Morningstar Advisor - Winter 2008 - 68
Morningstar Advisor - Winter 2008 - 69
Morningstar Advisor - Winter 2008 - Focus on Financials
Morningstar Advisor - Winter 2008 - 71
Morningstar Advisor - Winter 2008 - 72
Morningstar Advisor - Winter 2008 - 73
Morningstar Advisor - Winter 2008 - Strongest Homebuilders Will Withstand the Wrecking Ball
Morningstar Advisor - Winter 2008 - 75
Morningstar Advisor - Winter 2008 - Breaking Style Conventions
Morningstar Advisor - Winter 2008 - 77
Morningstar Advisor - Winter 2008 - Playing It Safe with Financials
Morningstar Advisor - Winter 2008 - 79
Morningstar Advisor - Winter 2008 - 80
Morningstar Advisor - Winter 2008 - Back to Bond School
Morningstar Advisor - Winter 2008 - 82
Morningstar Advisor - Winter 2008 - Mutual Fund Analyst Picks
Morningstar Advisor - Winter 2008 - 84
Morningstar Advisor - Winter 2008 - 85
Morningstar Advisor - Winter 2008 - 86
Morningstar Advisor - Winter 2008 - 87
Morningstar Advisor - Winter 2008 - Undervalued Stocks
Morningstar Advisor - Winter 2008 - 89
Morningstar Advisor - Winter 2008 - 90
Morningstar Advisor - Winter 2008 - 91
Morningstar Advisor - Winter 2008 - Most Popular Variable Annuities
Morningstar Advisor - Winter 2008 - 93
Morningstar Advisor - Winter 2008 - New at Morningstar
Morningstar Advisor - Winter 2008 - 95
Morningstar Advisor - Winter 2008 - The Style Counsel
Morningstar Advisor - Winter 2008 - Cover3
Morningstar Advisor - Winter 2008 - Cover4
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