Buy and Maintain Strategies
What is Buy and Maintain?
By aiming to reduce the risks inherent in bond investing through diversification, and focusing on lower turnover and thus transaction costs, Buy and Maintain strategies have two fundamental objectives:
- Avoid the inefficiencies inherent in passive or index-tracking approaches
- Harvest the maximum amount of income available in the bond market, as cheaply as possible
Today’s challenging bond market
The world has changed for corporate bond investors. Liquidity in the market (i.e. the ability to buy and sell bonds) is in sharp decline due to increased regulation and higher capital requirements since the financial crisis. This is a long-term structural change from which there seems to be no coming back.
At the same time, income from bonds are at historically low levels, meaning the costs of transactions within bond portfolios are eating into investors’ returns more than ever. In this new environment, it is increasingly difficult for investment managers to generate returns from active management.
The natural low-cost alternative to active management has historically been passive management. The drawbacks of such approaches are however well-documented (i.e. poor diversification, over-allocation to the most indebted issuers of bonds, and performance suffering by blindly following inefficient rules) and make little sense in the world of corporate bond investing. In this environment, Buy and Maintain strategies have become increasingly attractive.
Why consider Buy & Maintain?
- Diversified exposure to the bond market
- Conservative positioning
- Lower cost and less performance inefficiencies from lower turnover in the portfolios