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No one on Wall Street has a vested interest in having you do anything other than helping you generate pie charts of your investments and growing that pie by asking for more of your money.

Never Sell Anything

December 16th, 2020 by Kurt L. Smith
  • Years ago, and I mean many years ago, it became apparent that bond portfolio managers rarely sold bonds in their portfolio. Sure, active managers might sell something to keep their active manager label active, but rarely did a bond manager sell bonds in the portfolio to meaningfully move the needle on their holdings. If a manager did not like the market, she could enter a derivatives trade to place her bet instead.

    Another reason for the never sell mentality in bonds was the fact that more money usually came in the door. When bonds perform well, investors tend to stick with it or even add funds. Combine all this with the other fact that bonds do mature, and bond portfolio managers are usually in the position of deciding where to invest cash rather than the prospect of selling bonds to raise more cash.

    This has been the case for decades, though there may have been some managers slow in the 1980’s and early 1990’s to warm up to the fact that we were in what would become a multi-decade bond bull market. While the rise in the bond market has not been straight up, I would argue, from a portfolio management standpoint, it might as well have been. Bond portfolio managers have largely been reluctant to sell even prior to the large swoon in the financial crisis of 2007. If anything, the recovery since has largely reinforced the idea of never sell anything.

    You may think of stock and bond trades as having a buyer and a seller, so certainly there must be liquidity and selling going on otherwise we would not see any trading volume. True, but in the bond world at least, the market is largely distribution. New bonds are distributed by Wall Street; that is our function. When we focus on true selling, the kind that moves the needle in bond portfolios, this does not occur. In other words, there is an appearance of liquidity, but in my opinion, this is no infrastructure to handle selling.

    This is particularly true in the municipal bond market, though I would argue it applies to all bond markets, which means it applies to stocks as well. In municipals, the market distributes bonds. It is not prepared for widespread selling because widespread selling has not occurred. The entire mutual fund complex was largely invented and scaled up in a period bereft of selling.

    At least the mutual fund complexes offer you liquidity and the ability to sell your investments. As investors have drifted away from stocks and bonds and moved, or stampeded, into alternative investments, now is the time for investors to make use of the semblance of liquidity while the opportunity exists. You should focus on paring back, I mean sell, your alternative investments.

    After many years of this latest bull market, there is nothing new under the sun. Everyone is looking for income. Everyone is looking for diversification. And seemingly there is plenty of liquidity to move about. In my opinion this mirage of liquidity will not continue. The complacent (never sell anything) will be left doing exactly that because that is how investors act. They have been doing it that way for years.

    No one on Wall Street has a vested interest in having you do anything other than helping you generate pie charts of your investments and growing that pie by asking for more of your money. Selling on Wall Street means going to cash and where is the money in managing that? Never sell anything is the mantra; put in your ear plugs and navigate away from the rocky shoals.

    Angleton Independent School District, TX

    Unlimited Tax School Building Bonds, Series 2021

    Aa3 Moody Underlying (Aaa Permanent School Fund)

    Due 2/15   Dated 1/1/21 Maturity 2/15/45

    $28,510,000 Sold

    Years   Maturity     Coupon      Yield*

     1            2021           4.00%          0.18% (8/15/21 Mat)

     2            2022          4.00%           0.22%

     3            2023          4.00%           0.25%

     4            2024          4.00%           0.28%

     5            2025          4.00%           0.32%

     6            2026          4.00%           0.35%

     7            2027          4.00%           0.45%

     8            2028          4.00%           0.60%

     9            2029          4.00%           0.75%

     10          2030          4.00%           0.88%

     11          2031**      3.00%           1.00%

     12          2032**      1.00%           1.15%

     13          2033**      1.25%           1.25%

     14          2034**      1.25%           1.35%

     15          2035**      1.50%           1.45%

     16          2036**      1.50%           1.50%

     17          2037**      1.50%           1.55%

     18          2038**      1.50%           1.60%

     19          2039**      1.75%           1.70%

     20          2040**      2.00%           1.75%

     21          2041**      1.75%           1.70%

     23          2043**      2.00%           1.75%

     24          2045**      2.00%            2.00%

    *Yield to Worst (Call or Maturity) ** Call 2/15/30

    Source: Bloomberg

    This is an example of a new issue priced the week of 12/8/20

    Prices, yields and availability subject to change


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