Now more than ever, you need to know a bond fund’s hidden risks.
Here are 3 questions to ask:

Does the fund’s
size limit its range of opportunities?
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Many small bond issues show solid structural and performance characteristics, but they’re problematic for megafunds as the entire issue might account for only 1 or 2% of total net assets. So large funds gravitate toward large bond issues, leaving behind a wealth of opportunity. For sheer flexibility, the advantage goes to funds whose managers can invest with conviction in smaller bond issues, while also allowing for participation in much larger issues.

The graphic above is intended to illustrate the allocation impact a hypothetical $20 million bond investment (represented by the white boxes) would have in two portfolios of differing asset size.

Do you know what’s really driving fund
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Beyond a certain size threshold,
it becomes difficult for megafunds to transact in the cash bond market. Gaining exposure to certain parts of
the market may require large volumes of derivative contracts, which then introduces special counterparty and liquidity risks. A more transparent solution lies with funds where bonds have been the primary source of historical performance, and where derivatives are used mainly for
hedging and risk management.

The chart above is hypothetical and for illustrative purposes only. It does not represent the fund’s, or any, actual portfolio.

Is the fund guided
by one person’s perspective or
a team’s?
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Diversification isn’t just prudent in
a portfolio—it’s prudent in fund management, too. The complexity of today’s bond marketplace calls for greater consistency, collaboration and discipline in the decision-making process. At the same time, multiple perspectives can bring a breadth of expertise and depth of knowledge that are challenging for any one person to match. This is why many investors are now looking to funds that are directed by a team of experienced managers.

For illustrative purposes.

Three bond funds that every investor should know.

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Dreyfus offers a wide variety of bond funds that are timely, sensible alternatives to megafunds. The three funds featured here are good examples. All three are guided by the expertise of Standish, a BNY Mellon investment boutique with 80 years of fixed income experience — and are designed to manage single-mind risk, transparency risk, and capacity risk at the strategy level.

Meet our other boutiques with fixed income expertise