Although we trade individual bonds, with the exception of treasuries, the liquidity is poor for smaller positions, 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 longer maturing municipal bonds. For those with self-directed IRAs, however, we prefer higher yielding, fully taxable alternatives (including Build America Bonds which are simply taxable municipal bonds). When markets are in distress, we also have the background and experience to invest in a wide variety of structured products.
We will use 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. And for older investors, we will purchase Internote corporate bonds. These bonds imbed an option to “put” the bonds back to the issuer upon death of the holder, a potentially valuable option for an estate but not always priced in by the market.