Many investors believe corporate bond returns are limited to a bond's yield. They build ill-conceived bond ladders, hold bonds to maturity, and then do it all over again. Investors who build
bond ladders and hold bonds to maturity will never achieve a return higher than a bond's yield to maturity.
Luckily, there is a better way, which can drive higher returns for bond investors.
Through our investment analysis, we identify corporate bonds that are undervalued relative to other bonds in the marketplace. These bonds pay coupons higher than other corporate bonds with similar risk and have an opportunity to increase in price and drive total returns that can beat the market.
What Corporate Bond Returns Do We Seek To Achieve?
While annual total returns can vary year to year, our goal is to recommend bonds that can achieve annualized total returns in excess of 10%. We recommend both investment grade corporate bonds and high yield corporate bonds, and we have shown that high returns are not only the domain of the riskiest bonds.
As we show on our returns page, many of our highest-returning bonds were rated investment grade. Since bond ratings are biased toward large companies and generally ignore a bond's price, yield, liquidity, maturity date vs. bonds issued by the same company, and interest-rate sensitivity, we find them to have limited use for the serious corporate bond investor.
How Do We Maximize Corporate Bond Returns?
There are three key components to how we maximize corporate bond returns:
1) Be Selective: On any given day, there are 9,000 individual corporate bonds available to individual investors. BondSavvy's Job #1 for our subscribers is to narrow the corporate bond universe to a select number of corporate bonds that can beat the market. Our comprehensive investment analysis is at the center of identifying corporate bonds with strong upside with a reasonable level of risk. Selectivity is one of the biggest advantages of owning individual corporate bonds vs. bond funds, as we can focus on investments with the best risk/reward opportunities. Our investment analysis is a big step up from the old way of bond selection, where investors would simply look at a bond's rating and its YTM and buy bonds.
2) Carefully Monitor Financial Performance of Issuing Companies: BondSavvy makes 20+ initial buy recommendations each year. We make an initial recommendation based on where we find value on each new bond recommendation date. Over time, the recommended bond's price will move, and the financial performance of the issuing company could either improve or worsen. As a result of these changes, BondSavvy updates its corporate bond recommendations following company quarterly earnings releases during The Super Bondcast. During this subscriber webcast, we update subscribers on the financial performance of each company and whether our previously recommended bonds are buys, sells, or holds.
3) Sell Bonds To Maximize Returns When Upside Wanes: Since our goal is to achieve returns higher than a corporate bond's YTM, we sell bonds we believe have limited upside potential. We consider a variety of factors when deciding to sell previously recommended bonds, which we discuss in this blog post. As we discuss in the blog post, corporate bonds do have ceilings and cannot increase without limit like stocks. Given the favorable tax treatment of capital gains, after tax, one dollar of capital gain is worth more than one dollar of interest income. We are, therefore, vigilant when monitoring our corporate bond recommendations so we can protect our capital gains and maximize returns.
A Word About Corporate Bond Returns Shown in Your Brokerage Account
When evaluating investment performance, investors should be wary of the prices they see on their brokerage statements, which do not show the bond's total return and often undervalue the bond held. The price shown on an investor's statement is called "an evaluated price," which is an estimated price at which a large institutional money manager could sell the bond. Investors owning smaller quantities can often achieve better price execution than investors needing to sell $1 million plus of bonds, so always check a bond's depth of book to see what the current market price of your corporate bond is.
In addition, brokerages typically only show the bond's capital gain/loss when showing its return. Most do not show a bond's total return, which includes interest income received and accrued plus capital appreciation / loss. When we calculate our returns, we show total returns and compare these to leading corporate bond ETFs.