Subject: Target Maturity Funds (TMFs)
In Ch 8, Wright deals with 'wrapper products', one of which is UITs of which 'target maturity funds' could be considered a cousin. "UIT's", she says, "benefit from professional selection, not from professional management." (P. 120, 2nd ed.) A second benefit is a stable income payout. A third benefit --and of huge importance-- is a known maturity, unlike bond funds, which aren't really bond funds but shares of a company that invests in bonds, hence, --really-- just a derivative that most investors fail to use effectively.

So, what are the downsides of target maturity funds? I don't know for mostly having ignored them in favor of owing the underlying directly. But it's become time to take a look.

[later]

Holy Moly! TMFs --of which there are around 30-- suck majorly. To take just one example, IBDT, go to its issuer's website and pull the prospectus. There is nothing to like about the fund, and the lawyers have shifted all risks --a couple dozen listed-- onto shareholders, as well all but said you're more likely than not to lose money from owing the fund. But here's the real kicker. Though the fund's mandate limits it to "invest-grade" debt, that limit includes Baa3/BBB- (as it must). But that stuff is trash you don't want to be owning. An honest, solid, double-BB? Yes, because the uncertainties have been removed, and the market has (probably) properly discounted its risks.

IBDT's distribution yield is 3.25%, and its 30-day SEC is a not unattractive 5.11%. But now consider this. Even a crummy, minimal-risk, 13-week T-bill offers 4.677% (as of last auction) which --when bumped up by the impact of one's marginal, state tax-rate, as one must-- could easily tag 5.13%. Opps. If that isn't trading elephants for rabbits, I don't know what is.

Here's the second kicker. If you run a bond scan asking to see all invest-grade debt with the same max maturity as IBDT and a min 5% YTW, you'll get 490 issues returned whose YTWs range from 5% to 11%. The higher-yielding stuff is the usual suspects. But not all of it can be rejected out of hand. One by one, every one of those issuers would need to be vetted, and if one's fundie screens are met, positions could be sized such that one could put together one's own version of IBDT without having to match its 420 holdings and with the likely assurance of beating its CY and YTM by a reasonable margin.

Those kinds of facts are exactly why I'm a bond guy and not a bonds *funds* guy. Yes, bond funds seem attractive because they seem to offer "diversification" though their large number of holdings. But, as we all know, when markets are under stress, correlations go to 1.0. Opps. Exactly when "diversification" is most need, it disappears. What can save your butt, though, is 'position-sizing', which is a post for another time.