Benefits and risks of target maturity bond funds

Target maturity bond funds offer advantages for investors looking to meet certain cash flow needs.

These funds are “a really great way to get exposure to attractive yield and diversified investments, but for a specific short-term need of a client,” said Aaron Young, vice-president of global fixed income with CIBC Asset Management, in a recent interview.

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Instead of owning a single bond, GIC or other income investment, a target maturity bond fund is “an opportunity to meet that cash flow need across a diversified set of bonds within a single, easy one-ticket solution,” Young said. 

The funds can also fit within an overall 60/40 balanced portfolio to meet the short-term need, such as a large purchase or child’s tuition, Young said.

He also highlighted the benefit of target maturity funds that prioritize the purchase of bonds trading at a discount: conversion of a portion of income into capital gains, potentially yielding better after-tax returns —particularly beneficial for non-registered accounts.

“That’s important for clients who care … about how much money they take home, not just how much money they make,” Young said.  

Target maturity bond funds also enable investors to benefit from asset managers’ scale. 

“An asset manager can bring the weight and expertise of their history to source the best pricing for clients and investors in a target maturity bond fund,” Young said.

He cautioned that the funds also carry risks, including mark-to-market volatility and credit risk, though these can be mitigated, respectively, by holding to maturity and selecting managers with credit research expertise and independent sector analysis.

Lastly, target maturity bond funds are not only investment vehicles to address specific needs but are also tools to promote client conversations, Young said. For example, a client may have multiple GICs at multiple institutions, and advisors can speak to clients about the goals of those investments.

“Is it truly because you need that surety of principle and you’re meeting a future cash flow?” Young said. “Or is it reaction to market volatility?”

Those conversations can uncover what’s driving client decisions and help advisors match near-term liabilities with appropriate investments, Young said.

This article is part of the Advisor To Go program, powered by CIBC Asset Management. It was written without input from the sponsor.