Swensen on Fixed Income
This guy, Yale Endowment Fund manager, has some negative things to say about retail investors/institutional investors (atlhough they have more leeway) investing in bonds, outside US Treasuries. From what I understand, his main objections are:
- There are risks in bonds that the average investor is not compensated for or does not if he is being fairly compensated.
- HG Bonds: His view is that the capital gains are limited as the rating has no way to go but down, and if the market rallies in a low rate environment, the chance of bonds getting called is high.
- HY Risk: In addition to the above, the credit risk is huge, and although the yields are large, historically the returns have not outperformed other asset classes like equities. Again, if you want capital gains, why wouldn't you just invest in the equity, and if you want the yields, chances of getting called are high in low rate environment and youre not being compensated for the credit risk.
In both of the above, he says company's management is more in line with the equity portion of the firm's capital structure, so basically there is limited upside and huge downside in the above two scenarios for the average investor.
This is my understanding, but feel free to argue if I am wrong on what he is saying. But, assuming I am right in my understanding, can anyone come up with rebuttals for investing in bonds?
