Great rotation? Advisers buying bonds to adjust asset mix

Stock rally as good a time as any to review allocation

Mar 7, 2013 @ 10:19 am

By Jason Kephart

This isn't the great rotation you were looking for. Advisers are celebrating the Dow Jones Industrial Average's new all-time high by buying bonds.

With stocks on a roll to start the year, and bonds lagging, some advisers are taking the fanfare around the market's new high as an opportunity to talk to clients about taking a fresh look at their asset allocation.

“What we try to keep people focused on is when something is doing really well, it's just as much of a trigger to review where you are as when something's not doing well,” said Diahann Lassus, president of Lassus Wherley & Associates PC. “Instead of getting caught up in the euphoria, let's see where we are.”

The DJIA, a basket of 30 leading industrial companies, was up more than 9% this year through yesterday, when it posted its second-straight closing high, finishing at 14,296 after punching through its Oct. 11, 2007, closing high of 14,164 on Tuesday.

By mid-morning today, the blue-chip barometer was ahead about 45 points to 14,341.

The S&P 500 isn't far behind, with an 8% return. It closed yesterday at 1,541, just points shy of its previous high of 1,565 in October 2007.

Bond indexes, meanwhile, have started the year flat. The Barclays Aggregate Bond Index is down 50 basis points, while the average intermediate-term-bond fund, with a 17-basis-point return so far this year, hasn't done much better.

Intermediate-term-bond funds hold almost half of the more than $2 trillion in all bond funds.

The discrepancy in returns is throwing some portfolios out of whack with their long-term targets. A 50/50 portfolio of stocks and bonds at the start of the year, for example, would be closer to 55/45 right now.

That has advisers thinking about re-balancing and taking profits.

“The hardest thing to actually do is buy low and sell high,” said Doug Taylor, principal at Taylor Wealth Management LLC. “Right now, people want to let things ride because they're going great, but things can change tomorrow.”

Of course, getting clients to leave a good thing could be a challenge.

“No one wants to leave a party,” said Kevin Brosious, president of Wealth Management Inc.

He hasn't heard so much as a peep from clients during the market's run-up, so he's proactively reaching out to clients now to talk to them about re-balancing.

Re-balancing now presents a somewhat tricky proposition, given the not-so-rosy outlook for bonds.

“Bonds are not our favorite thing right now,” Ms. Lassus said.

For her clients who are retired, some of the profits are going to cash they'll need within the next six months.

The rest are seeing their money go into short-term-bond funds. Mr. Taylor and Mr. Brosious likewise are targeting short-term bonds for their clients because of worries about rising interest rates.

A 1-percentage-point increase in interest rates will cause a bond fund to lose approximately 1% for every year of its average duration. By staying in short-term-bond funds, which typically hold average durations of one year, advisers are limiting their downside.

That may not be the most attractive option, but more importantly, the re-balancing is helping to make sure the risk levels of the portfolio don't get out of control, thanks to stock gains.

“We'll never time this perfectly,” Mr. Taylor said. “But as long as we stick with the plan, we'll come out ahead.”

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