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Book Reviews

Bonds (yawn) are in vogue.

By Jonathan Chevreau, Personal Finance, Financial Post

Perhaps because the subject of bonds seems so dull, few Canadian books have been devoted to them. Into that void comes Hank Cunningham's In Your Best Interest. The title plays on both interest income and the conflicts of interest the veteran bond trader perceives among some financial advisors who sell bonds.

With the advance guard of the Baby Boomers hitting 60 this year, bonds and other fixed-income investments are becoming as top of the mind as stocks have been. Because interest income is taxed so harshly in Canada, bonds should be viewed as core holdings in RRSPs and, ultimately, the income-generating RRIFs to which most RRSPs are converted in retirement.

Increased Boomer demand for income is already putting pressure on the asset class, Mr. Cunningham says. Further demand is coming from giant pension funds, which must match investments to future liabilities as workers retire.

This is a global phenomenon: Mr. Cunningham notes the United States is reissuing 30-year bonds this month, while France and the U.K. are issuing 50-year bonds.

Because bonds lack glamour, they tend to be less understood than stocks or equity mutual funds. Conscious that bonds are a mystery to most investors, Mr. Cunningham includes a chapter on basic math as it applies to present value, bond duration and other fine points of the trade.

He also goes into the intricacies of bond trading desks and pricing. Mr. Cunningham believes bonds are not as "transparent" to investors as stocks: Commissions are not readily visible to retail investors.

The book, on shelves this month, seeks to help investors find the minority (10% to 15% in Mr. Cunningham's opinion) of financial advisors who act in the "best interest" of their clients. In a nutshell, Mr. Cunningham hates bond mutual funds and bank GICs (guaranteed investment certificates) and loves strip bond ladders and nominal bonds (i.e., ordinary government or corporate bonds paying regular interest).

Mr. Cunningham comes by his antipathy for bond funds honestly: He once managed the largest bond fund in the country, Investors Bond Fund. Today, he sees little reason to pay high fees for fund managers to gamble on the bond market when investors can buy bonds directly for a fraction of the price.

He likes strip bond ladders for RRSPs because they're cost effective and investors can plan long in advance for a retirement income that is precisely known. By buying 10 different bonds that mature every year from 2007 to 2016, for example, investors can avoid reinvestment risk and the capital losses that can occur if interest rates move in the wrong direction. Investors pay only a one-time commission to acquire such bonds (typically a reasonable 1%) and avoid the high management expense ratios (MERs) charged by bond mutual funds each and every year. Another problem with bond funds is that -- unlike the underlying bonds themselves -- the funds never mature, so the ultimate return is unknown.

For investors who nevertheless insist on funds, Mr. Cunningham prefers bond exchange-traded funds, which have MERs of 0.3%, compared with 1.4% for the average Canadian bond mutual fund. However, bond exchange-traded funds share with bond funds the problem of unknown future returns. The practical suggestion for retail investors is to use at least two investment advisors -- obtain quotes on bond prices from both to ensure you're getting the best price. A useful list of questions is also included in the book, such as whether a dealer's bond desk serves as a stand-alone profit centre.

Except for the extremely risk tolerant, most investors need fixed-income securities in their registered plans. I'd guess most could benefit by spending $25 for Mr. Cunningham's book.

 You can also read more about this here at www.FPinfomart.ca

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