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Climbing the Ladder

By Melanie Waddell

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LaSalle Broker Dealer Services unveiled in January a bond laddering tool designed to help individual investors protect their portfolios against interest rate risk.

LaSalle’s bond laddering tool allows advisors and their clients to ladder corporate bonds within the brokerage firm’s Direct Access Notes, or DANs, program. Laddering involves buying bonds with maturities distributed over time. For instance, instead of trying to decide whether to buy a three-, five-, seven-, or 10-year bond, the investor buys them all. “When the three-year [bond] matures, now you go back to the other end and buy a 10-year bond because your 10-year bond now has a seven-year maturity,” says Patrick Kelly, managing director of LaSalle Broker Dealer Services in Boca Raton, Florida, a division of LaSalle Bank. “What you’re doing is spreading your investments across the yield curve or the investment spectrum,” and are therefore reducing interest rate sensitivity,” says Kelly, who’s also principal of ABN AMRO Financial Services, Inc., a LaSalle subsidiary. Bond laddering is “almost like dollar cost averaging in stocks: you’re investing on a steady and periodic basis and [are] less concerned about [which direction] the market heads.”

Buying only short-term securities helps investors mitigate interest rate sensitivity, but it often means sacrificing yield. Investing in long-term securities, on the other hand, offers greater return potential, but can often result in more volatile prices and greater potential losses if the investor has to sell the bond before it matures. Bond laddering smoothes out the portfolio yield over time.

While bond laddering is not a new concept, LaSalle has created a first-of-its-kind tool allowing advisors to perform what-if scenarios. Brokers and advisors have said, ” ‘I like the [bond laddering] concept, but show it to me,’” Kelly says. By logging on to www.directnotes.com, advisors and their clients can click on the bond ladder icon and access all of the corporate bond issues that are available in LaSalle’s DANs program. Corporate bonds included in the program are GMAC SmartNotes, Caterpillar PowerNotes, UPS Notes, Freddie Mac Notes, Tennessee Valley Authority electronotes, LaSalleNotes, IBM Notes, John Hancock Life Insurance Company SignatureNotes, and SLM Corporation EdNotes.

Like the first-issue corporate bonds offered by the Chicago-based investment banking firm Incapital, LaSalle’s Direct Access Notes are corporate bonds that are issued at par ($1,000) and in denominations of $1,000, are rated A or higher, and are offered weekly on an ongoing basis. LaSalle sells its DANs through more than 600 broker/dealers and their affiliated advisors.

With the bond laddering tool, which is in Excel format, Kelly says an investor with $100,000 to invest could spread $10,000 among each of the corporate bond offerings and determine what the average return, maturity, and cash flows would be. An advisor and their client could “see what it would look like if [the client] bought $10,000 of the GMAC Smartnotes, $10,000 of the Catepillar 5-year notes, et cetera,” Kelly says. The investor could do the same with only $10,000, if that’s all he had to invest.

For best results at the outset, Kelly says advisors and their clients should get acquainted with the bond laddering tool together. “As the investor becomes more educated,” he says, the investor can play with the tool herself. “But at the end of the day, she still needs to call her investment advisor to execute” any transactions.