18 January 2011

How safe is your "safe" bond fund?

Not as safe as you may think, or as your financial adviser may promise you. As many investors are hankering for more regular income many bond funds are managed in a way that puts the emphasis on high yields at the cost of adding more risky holdings to the portfolio. And if you have thought that bond fund managers are willing or able to learn from such mistakes then you have another thing coming. What about selling short currencies, buying credit default swaps? On top of these higher-risk strategies investors are expected to pay higher fees - presumably on the pretext that these strategies will be more profitable. But if things go wrong - and they can and will - the only one left with higher - and even guaranteed profits - will be the fund manager while investors are left holding the bag.