Fixed Income Analysis

Bonds are boring. We know. We believe that if used correctly, bonds are supposed to be boring. If someone tells you there is some "exciting" news about your bonds, that's probably not a good thing.

At Kovitz, bonds are not an afterthought the way they tend to be at other investment management and planning firms. Corporate, municipal, federal government, and mortgage-backed bonds are a very significant portion of the assets we manage.

We tailor portfolios of individual bonds in separately managed accounts to clients' specific duration, credit quality, liquidity, and tax parameters. Combining our commitment to understanding and managing to each client's particular circumstances and our appreciation of nuances inherent in the bond markets allows us to seek meaningfully additional yield without accepting undue risk. For example:

• In a retirement account for which liquidity may not be a high priority, we can consider taxable, non-agency mortgage-backed bonds.
• For a client who is not subject to the alternative minimum tax, we can add higher yielding private activity bonds to a municipal bond portfolio.
• For a client who is indifferent as to whether a bond matures in one calendar year or the next, it might make sense to buy a bond with a short call window, where we would be willing to take short maturity extension risk in exchange for meaningfully higher yield.

In each of these cases (and many other similar situations), we are willing to devote the resources to understand our clients' situations and take advantage of what the market will provide to earn higher yields, while trying to avoid sacrificing credit quality.

In constructing our clients' bond portfolios, we take advantage of the "odd lot discount," which often is a huge competitive advantage for our fixed income clients. We will patiently bid on smaller bond lots available from unaffiliated third party dealers in order to purchase at lower prices. This works like a reverse volume discount as there is very little institutional demand for smaller bond lots. A big bank or brokerage firm prefers to buy a single minimum $1 million bond lot into its inventory to be divided among a number of clients. We're willing to devote the time to bid for our clients on these smaller pieces with the goal of providing them the higher yield.

At Kovitz, we don't buy and then inventory bonds for later sale to our own clients at a marked up price. Many banks and brokerage firms sell their clients bonds from their own inventory. They are essentially taking the other (sell) side of the transaction. At Kovitz, the price that we pay for the bond is the price that you pay for the bond, and that bond is bought with your particular needs and circumstances in mind.

Finally, Kovitz does not custody your bonds. Our clients' assets are held at Pershing, LLC, a Bank of New York company and the nation's largest clearing firm. Separation of custody from management is a key internal control that we believe all clients should look for when hiring an investment advisor