What’s Baked into Your Credit Exposure?

Corporate bond funds have seen strong inflows to start the year. As investors select funds with credit exposure, they should be aware of what’s baked into a manager’s approach, or not.

Baking is not a “set it and forget it” process. While you start with a suggested bake time, monitoring is important. Attentive bakers rely on real-time information from their eyes and nose to pull cookies out of the oven when appropriate, not necessarily when the timer goes off.

The same way your senses can help avoid burning cookies, real-time information in market prices can help avoid unfavorable credit-related outcomes in your bond portfolio. An active credit monitoring process may start with a suggested credit rating, as issued by a credit rating agency, but can sniff out when bonds begin trading differently. For example, if a BBB-rated bond begins trading like a BB, an attentive investor can act early to sell that bond out of their investment-grade portfolio. This may help avoid the costs of a potential future downgrade and maintain a more consistent risk profile in the portfolio.

You can do better than a passive, “set it and forget it” approach, in cookies and credit exposure alike.1

Exhibit 1 Are You Taking On More Risk than You Think?
An investment-grade bond may begin trading like a high-yield bond before a credit rating agency issues a downgrade

  1. 1. The cookie varieties shown are for illustrative purposes only. The author is of the opinion that all cookies are delicious.
DISCLOSURES

The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information only. “Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. Please click here to read the full text of the Dimensional Fund Advisor Disclaimer.

About the Author Douglas Finley, MS, CPWA, CFP, AEP, CDFA

Douglas Finley, MS, CFP, AEP, CDFA founded Finley Wealth Advisors in February of 2006, as a Fiduciary Fee-Only Registered Investment Advisor, with the goal of creating a firm that eliminated the conflicts of interest inherent in the financial planner – advisor/client relationship. The firm specializes in wealth management for the middle-class millionaire.

follow me on:
>

Stay Informed With Our Latest Articles To Increase Your Financial Awareness