Morningstar Advisor - August/September 2013 - (Page 10)

On Topic Has Your View of Bonds Recently Changed? Let us know your thoughts at magazine_editor@morningstar.com I have lowered durations on my clients’ fixed-income holdings and have discussed with clients the potential volatility in this sector in the years ahead. Clients have a false sense of security in bond funds, so I am setting the expectation and using the opportunity to review their overall allocations. Jennifer Jurek, CFP Sgroi Financial West Seneca, N.Y. Nothing that’s happened recently is a surprise; these events weren’t about “if” but “when.” The Fed can’t buy bonds forever. Governments can’t support banks forever. Rates can’t stay at comatose levels forever. If bond allocations have been appropriately diversified in anticipation that the above is true, then nothing changes. What will change for me is when money market returns rise sufficiently to become a viable store of capital. Then, I’ll probably reduce bond allocations somewhat. Kathleen Scharl, CFP Scharl Advisory Services, Inc. Durham, N.C. Recent events in the fixedincome markets have not changed my view of bonds’ role in my clients’ portfolios, although it has made it much more interesting. In my 25 years in the investment business, this is by far the most challenging bond market I’ve encountered. Bonds still play an important role in producing income, protecting against economic weakness, and having a historic low correlation to other 10 Morningstar Advisor August/September 2013 assets. I’m maintaining a duration of 3.5 to 4.0 years and overweighting bank loans, high yield, and global bonds. By maintaining a low duration and being in the right bond sectors, clients should be able to generate an adequate return if faced with a gradual rise in interest rates. Stephen Blomberg, CFP Ameriprise Financial Services Indianapolis, Ind. Quick Poll (given July 9, 467 responses) 1 In clients’ long-term portfolios, have you recently adjusted the weighting of bonds relative to equities? Underweighting bonds 44.4% Overweighting bonds 3.3% No change 52.3% 2 Do your clients invest in individual bonds? Yes We have lightened up on intermediate corporate bonds as we had been riding the “bond bull” since 2009. We advise qualified retirement plans and are now back to a 50/50 equity/debt allocation. Roy Gust Benefit Performance Advisors, LLC Scottsdale, Ariz. 53.7% No 46.3% 3 In your bond investments, which risk most concerns you? Interest rate 66.2% Credit 6.3% Both 27.5% 4 Where are you putting clients’ cash positions? Savings account Doesn’t change anything. Bonds still de-risk a portfolio and provide income for those who need it. In my opinion, fixed-income investors had become overly complacent about Fed policy and overly leveraged as a result. Mr. Bernanke’s comments starting in May were a wake-up call, although as is often the case, investors probably overreacted to it. I expect rates will drift back down again. We’ve had more capital appreciation in fixed income than we should expect, and now, we’ve given some of it back. Steve Dubin Williams & Dubin Quincy, MA 3.3% CDs 1.6% Money market funds 34.1% Ultrashort bond funds 26.9% Longer-term bond funds Some combination of above 0.2% 33.9% 5 What is the main role bonds play in your clients’ portfolios? Diversification 51.4% Capital preservation 25.5% Income 22.6% Capital appreciation 0.5%

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2013

Morningstar Advisor - August/September 2013
Contents
Contributors
Letter From the Editor
Under Pressure
Has Your View of Bonds Recently Changed?
The Simple Life Cuts a Path to Prosperity
How Extended Is Your Bond Fund?
A Bond Contrarian Scours the Globe for Value
Investments á la Carte
Investment Briefs
Bond Market Behemoths
Shopping in the Digital Age
Shopping in the Digital Age
Diverse Crowd
Motor City Meltdown
Bond Convergence
Corporates Are Fairly Valued, but Opportunities Will Arise
A Legend Still Pines for the Good Fight
Greener Pastures
Forecasting Market Bubbles and Crashes
Forecasting Market Bubbles and Crashes
Home-Court Advantage
Overcoming Technophobia
These Funds Are Counting on Undervalued Sectors
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
What Price Advice?

Morningstar Advisor - August/September 2013