The Big Screen: The Best of the Bond-Fund Breed

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They always said bond funds would lessen your pain when stocks tank and now you know it's true. If you're sniffing around this less-racy pack, we've done some legwork for you.

What's that you say? Why bother with bonds? Yes, bonds do typically return less than stocks, but over time, a modest bond-fund dose can reduce your stock-stuffed portfolio's volatility less than it reduces its returns. The idea here is that a bond fund's steady monthly income and modest gains can help you ride out tough times when stock prices plummet.

For example, adding just a 10% allocation to the Vanguard Total Bond Market fund, which tracks the broad Lehman Brothers Aggregate Bond Index, to a U.S. stock portfolio would've cut the stock portfolio's one-year loss from 12.9% to 10.5% and sliced the portfolio's worst one-year return over the past decade from 21.6% to 18.6%, according to Morningstar.

Why It Makes Sense to Own Bond Funds
	100%: (VFINX)Vanguard 500 Index	90%: (VFINX)Vanguard 500 Index10%: (VBMFX)Vanguard Total Bond Market Index
One-Year Return	-12.9%	-10.5%
Three-Year Return	5.3	5.6
Five-Year Return	15.5	14.9
10-Year Return	15.2	14.5
Worst Year	-21.6	-18.6
Best Year	52	47.4
Source: Morningstar. Data through May 1.

Unlike last year, investors have stuffed money into bond funds this year. The reason: They're seeking diversification from the sagging stock market with the average big-cap growth fund down almost 23% over the past year, compared with an 11.8% gain for the average intermediate-term bond fund, according to Morningstar.

If you're shopping for a bond fund, the three metrics you want to focus on are performance, risk and expenses, which can take a big bite out of a bond fund's typically modest gains. With that in mind, today the Big Screen sifts intermediate-term, multisector and high-yield bond funds. In each case we're whittling down the crowd to a handful of funds that beat their average peer over the past one-, three- and five-year periods with the current manager at the helm. We've also yanked out any fund with higher volatility than its average peer or above-average expenses.

The top funds in each category are ranked by their average annual returns over the past five years.

Intermediate-Term Bond Funds

These funds invest your money primarily in high-quality corporate bonds, government bonds and mortgage-backed bonds. Essentially, they're the vanilla core bond fund that can help smooth your stock portfolio's performance.

Topping off our top five is the no-load (FBDFX)Fremont Bond fund, where guru Bill Gross has held the reins since 1994.

Solid Intermediate-Term Bond Funds
	Five-Year Return	One-Year Return
(FBDFX)Fremont Bond	8.5%	12.9%
(DODIX)Dodge & Cox Income	7.9	15
(SRBFX)Stein Roe Intermediate Bond	7.9	15.2
(EINFX)Elfun Income	7.7	13.2
(VBMFX)Vanguard Total Bond Market Index	7.6	13.2
Category Avg.	6.7	11.9
Source: Morningstar. Annualized returns through May 31.

Gross and his vast team at Pimco, where he also runs the broker-sold (PTTAX)Pimco Total Return fund, don't swing for the fences, but their modest moves have consistently paid off. The fund, which carries a 0.62% expense ratio compared with the 1% category average, tops at least 75% of its peers over the past one-, three- and five-year periods, according to Morningstar. The fund's 8.5% annualized gain over the past five years tops 98% of its competitors.

Another fund that doesn't make drastic bets vs. the benchmark Lehman Brothers Aggregate Bond Index is the no-load (DODIX)Dodge & Cox Income fund. Lead manager Dana Emery hasn't taken big risks since the fund launched in 1989, and the fund's returns are tough to knock. Over the past one-, three-, five- and 10-year periods, it beats at least 85% of its peers. Its 0.46% expense ratio is also less than half that of its average competitor, according to Morningstar.

If you're obsessed with low expenses, though, you should look at the no-load (VBMFX)Vanguard Total Bond Market Index fund, which levies just a 0.20% annual toll. Rather than make bets vs. the Lehman Brothers Aggregate Bond Index, this fund seeks to simply chug along with it. It tops at least two-thirds of its peers over the past one-, three-, five- and 10-year periods, according to Morningstar.

Multisector Bond Funds

Members of this pack, also called strategic income funds, are essentially a one-stop shopping choice for more aggressive investors as they spread their assets among high-quality corporate bonds, lower-quality high-yield bonds and foreign bonds. Because high-yield and foreign bonds are riskier, these funds can offer higher returns over time but also entail additional risk.

Thanks to a tough high-yield bond market over the past three years, many aggressive multisector funds have sagged, leaving just three that make our cut.

Solid Multisector Bond Funds
	Five-Year Return	One-Year Return
(FSRIX)Fidelity Advisor Strategic Income	7.2%	8.4%
(NARAX)Phoenix-Goodwin Multi-Sector Fixed Income	6.9	11.4
(ATSAX)Atlas Strategic Income	5.8	5.7
Category Avg.	5.1	4.9
Source: Morningstar. Annualized returns through May 31.

As you might imagine, the funds that stayed ahead of their peers in recent years are those with a less risky bent.

John Carlson, manager of the (FSRIX)Fidelity Advisor Strategic Income fund since its 1995 inception, has opportunistically shifted among bond classes, beating his average peer each calendar year, according to Morningstar. The fund carries a 0.93% expense ratio vs. the 1.39% category average, and its 7.2% annualized gain over the past five years beats 88% of its peers.

Another steady performer is the (ATSAX)Atlas Strategic Income fund, run by Arthur Steinmetz and David Negri since its 1996 inception. Without making drastic bets on one bond class vs. others, the pair have beaten at least 60% of their peers over the past one-, three- and five-year periods. The fund carries a 1.16% annual expense ratio.

Two other multisector funds that are worth consideration but not on our list are the broker-sold (JHFIX)John Hancock Strategic Income fund and the no-load (RPSIX)T. Rowe Price Spectrum Income fund.

Fred Cavanaugh has run the Hancock fund since its 1986 inception -- when it started out as a high-yield portfolio. He's made savvy moves over the years, with a taste for high-yield bonds. The fund's 8.4% average annual gain over the past 10 years tops 77% of its peers and its 0.91% expense ratio is below average. The fund missed our cut because its 2.7% one-year gain trails that of its average peer.

If you're interested in broad diversification, you might consider the T. Rowe fund because manager Ned Notzon spreads its money primarily among the firm's other bond funds. The fund beats at least 80% of its peers over the past one-, three-, five- and 10-year periods, according to Morningstar. T. Rowe Price's Web site doesn't list the fund's expense ratio and it missed our cut because Notzon has held the reins for four years, not five.

High-Yield Bond Funds

Funds focusing on high-yield bonds might be worth a look if you're an aggressive investor and will also own less-risky bond funds. These funds tend to focus on bonds that offer above-average interest payments because the company issuing them has a short or checkered credit history. A string of defaults in the battered telecommunications sector has hit many of these funds hard -- high-yield funds are averaging a 2.1% annual loss over the past three years.

But some less-aggressive types have weathered the storm, like the no-load (CMHYX)Columbia High-Yield fund that tops our list in this category.

Solid High-Yield Bond Funds
	Five-Year Return	One-Year Return
(CMHYX)Columbia High-Yield	7.7%	9.2%
(LHIGX)Lipper High Income Bond	7.2	10.9
(LBNDX)Lord Abbett Bond- Debenture	6.5	6.6
(VWEHX)Vanguard High-Yield Corporate	6.5	5.9
(ENHYX)Enterprise High-Yield Bond	6.1	5.5
Category Avg.	-1.3	3.3
Source: Morningstar. Annualized returns through May 31.

Jeffrey Rippey has run the Columbia fund since its 1993 inception. Like most of the funds on our list, he tends to lean toward the higher-quality end of the junk bond pile. His approach is looking good now, with many of his peers having been sunk by sagging telecom companies' bonds. The fund, which carries a 0.91% expense ratio compared with the 1.29% category average, tops at least 90% of its peers over the past one-, three- and five-year periods, according to Morningstar. That said, investors should keep in mind that the fund tends to lag its peers when the junkiest bonds heat up.

Another solid option on our list is the (VWEHX)Vanguard High-Yield Corporate Bond fund, run by Earl McEvoy of Wellington Management for the past 16 years. McEvoy and his team also avoid the riskiest fare in the junk bond market, a strategy that has paid off handsomely in recent years. The fund, which carries a measly 0.28% expense ratio, tops at least 75% of its peers over the past one-, three-, five- and 10-year periods, according to Morningstar.

An intriguing choice that isn't on our list is the broker-sold (PHDAX)Pimco High Yield fund, run by Benjamin Trosky since its 1997 inception. The fund has weathered the recent years' storm, averaging a 2.7% annual return over the past three years, which tops 92% of its peers. The fund missed our cut simply because it lacks a five-year record.

There you have it, a list for those searching for a bond fund.

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