Creating a steady income stream with a corporate bond ladder strategy

Thomas H. Luster, CFA,  Co-Director of Diversified Fixed Income, and  John H. Croft, CFA,  Diversified Fixed Income Portfolio Manager/Team Leader

Boston  - Many fixed-income investors, particularly those approaching or in retirement, want a dependable income stream. A custom-built corporate bond ladder strategy is one approach that may help achieve that goal.

A laddered fixed-income portfolio can generate cash flows in the form of principal and coupon payments. Generally, investment-grade debt is lower risk than some other fixed-income asset classes, and the corporate bond ladder can create a customized income solution. However, proper ladder design is important for consistent cash flow and to reduce risks.

We believe these are important components of a corporate bond ladder strategy:

• An equally-weighted maturity structure.
• Roughly even allocations among bond index sectors for diversification.
• Caps on issuer concentration for further diversification.

A laddered portfolio of corporate bonds can be particularly helpful to investors who want to achieve an attractive total return, regardless of the interest-rate environment. While there may be price fluctuations over time, matching the maturities of the bonds to an investor's time horizon may help with the goal of capital preservation while mitigating reinvestment risk.

In the event of bond price declines, unexpected volatility or a liquidity event, investors can choose to allow the bonds within the ladder to mature. The transparent and consistent investment process of a ladder allows an investor to maintain a long-term view even in turbulent times, and worry less about short-term price movements.

Furthermore, investors can customize the laddered portfolio and tailor the maturities and characteristics to their individual circumstances and goals. Those characteristics can be fine-tuned as the investor's needs evolve over time. Importantly, a professional manager can perform the rigorous credit analysis of issuers of bond included in the ladder strategy, and transact in a timely and cost-effective manner when constructing the portfolio. Clients also benefit from the ongoing credit surveillance of the holdings in the laddered portfolio by a team of credit analysts.

Bottom line:  We believe risk exposures should align with an investor's unique set of circumstances. The proper design of a corporate ladder by experienced investment professionals can help ensure that a dependable income stream is delivered. Rigorous credit review and monitoring is another key benefit of professionally managed laddered bond portfolios, potentially minimizing a major source of risk for both investors and financial advisors.