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Portfolio > Mutual Funds > Bond Funds

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Once, if an advisor wanted corporate bonds for a client there were three choices: buying them directly; in a unit trust; or a mutual fund. Is there an easier, more elegant way to invest in corporate fixed-income? Tom Ricketts, president/CEO of Chicago-based Incapital LLC, thinks so. He co-founded the firm in 2000, and InterNotes in 2001, enabling advisors to buy newly issued, investment grade, corporate securities at par, in denominations of $1,000. Ricketts spoke with Staff Editor Kate McBride in late September on what advisors are doing with corporate fixed-income securities.

What trends are you seeing among the broker/dealers?

In our product, January was the lowest month of sales we’ve had in the six years of Incapital, but August was one of the top months in sales in six years, so what we have seen is a sentiment shift. I think that goes back to the fact that it’s not [that] just everyone expects the Fed to keep raising rates anymore–the next Fed move will be determined by economic data.

There’s a risk that if the Fed thinks the economy is weakening, the first step it will take is to start lowering short-term rates. I think advisors are becoming aware that there’s an opportunity cost to leaving all their clients’ money in cash.

What gave you the idea to do fixed income this way?

For an individual investor to try to buy an individual bond it’s relatively complicated: [an advisor] calls a trader on the desk; if he’s at a smaller firm then that trader calls another trader to get the bonds, they come back with a price for the customer, it’s $104.15 but only if they buy it right now–so there’s a little bit of confusion about what the price would actually be. They might ask for a five-year bond and get a four-and-a-half-year bond; they might ask for Pepsi and get Coke. If they buy the bond at 104 they’ve got to amortize the premium on [the client's] taxes. In the end it’s just not a very attractive way for a financial advisor to spend their time. Bond funds are really not what individual investors want: individual investors want a series of interest payments and their money back, but because individual bonds were so complicated to buy, brokers would just default to the simpler transaction even if it’s the less appropriate transaction. Everything we sell is [in increments of] $1,000, investment grade names–household names–which makes the process very simple for both advisors and their clients.

How are you able to offer these at par all the time?

In a traditional bond underwriting, $500 million of bonds come to market all at once, and in a couple of hours $500 million is put away to 25 to 30 institutional accounts. What we said was, “We’ll get you $500 million but you’ve got to slow down the process for us, and you have to follow the principles that make it consistent with the way investors buy.”


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