02/20/2015

Active Fund Management for Bond Investors

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A Wall Street Journal article, published February 8, 2015, listed a number of circumstances in which it might be more beneficial to take advantage of active fund management rather than passive fund management tied to an index.  One circumstance on that list was investing in bonds.

Periods of rising rates are challenging for bond investors, and a bond fund portfolio aligned with a bond index may be along for the ride when rising rates, and correspondingly declining bond values, impact the market.  That is because an index fund, by design, will be aligned with the composition of the overall bond market, or a sector of the bond market, and therefore subject to comparable rate-sensitivity.

Active bond fund managers have the ability to take steps in an effort to mitigate, to some degree, the impact of market volatility.  With the ability to actively manage fund holdings over time, these managers may implement a number of strategies in order to adjust fund holdings based on market expectations.  Fund holdings may be altered by quality rating in an effort to manage credit risk – a risk which may increase along with rising rates.  Holdings may also be altered by maturity date and coupon, thereby adjusting portfolio duration, or the sensitivity of the portfolio to movements in rates.  Reducing portfolio duration would reduce sensitivity to a change in rates.

Liquidity in an actively managed open-end mutual fund may be provided by positive net purchases of fund shares, maturing bonds, called bonds, bond coupon payments, or the redemption of individual fund holdings.  As investment opportunities present themselves, cash available from these sources may be deployed by the fund manager based on the fund investment strategy and market expectations.  During an extended period of rising rates, there may be opportunities to purchase bonds issued with higher coupons.

Active management doesn’t assure that a particular investment strategy will be successful, but it does provide the opportunity for active fund managers to implement an investment strategy, rather than simply align the portfolio with an index and ride along with the market.

You will find detailed information throughout this site regarding the actively managed bond funds of Aquila Group of Funds.

Shares of the Funds may only be sold by offering the Funds’ Prospectus. Before investing in a Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. The prospectus is available on this site, from your financial adviser, and when you call 800-437-1020.