Although we trade individual bonds, with the exception of treasuries, the liquidity is poor for smaller positions, often forcing a hold-to-maturity strategy. As the risk inherent in a bond changes over time, we prefer the liquidity and more stable attributes of most fixed income funds.
Still, when the maturity of the bond matches the likely income needs of investors, avoiding the fee of a mutual fund or ETF can make sense. In those cases, for investors with limited tax-advantaged accounts, we will purchase municipal bonds. For those with self-directed IRAs, however, we prefer higher yielding, fully taxable alternatives. We also have the background and experience to invest in a wide variety of structured products, but especially in seasoned residential mortgage backed securities (MBS) issued well before the 2008-09 financial crisis and Asset Backed Securities (ABS). We feel we can often be paid to provide liquidity for small pieces that institutional investors otherwise avoid. Similarly, a very thin investor base allows for occasional opportunities to get paid for providing liquidity in preferred shares and subordinated debt, often for finance companies with the added benefit that their coupons are considered dividend qualified and thus taxed at a lower rate.
If interest rates are adequate, we can also use government bonds, especially treasury strips (bonds that are stripped of their coupon and thus have greater sensitivity to changes in interest rates), less as a bet on rates and more as a hedge to equities.