Choosier Investors Choose the Fremont Bond Fund

With bonds outreturning stocks this year, bond funds are lapping up about 30 cents of every dollar sunk into mutual funds. So let's make sure we're being choosy.

To that end, this week we're ushering the no-load (FBDFX Quote)Fremont Bond fund into our Ima Winner Fund Club and dragging the flailing and broker-sold (PINCX Quote)Putnam Income fund into our Ima Loser Fund Club. Both live in the intermediate-bond fund category, which is up 12% on average over the past year, compared with a whopping 24% loss for the S&P 500. We sifted this pack for decent choices just last week.

Picking a solid bond fund is similar to choosing a sturdy stock fund. In both cases, you're looking for a fund that consistently beats its peers, isn't susceptible to outsize short-term losses, charges below-average expenses and has had the same manager for at least five years or so.

With bond funds, however, expenses and low risk typically stand taller than usual. After all, high expenses can whittle modest returns in a hurry, and you're usually buying a bond fund to reduce your portfolio's volatility, not boost returns. (For details on how bond funds can reduce volatility, check out this story.)

Most bond funds are looking pretty good these days, compared with stock funds. But some are clearly superior and some are clearly not. To illustrate our point, let's check out our winner, then our sinner.

The Winner

Past Winners

Core Stock: Vanguard Total Stock Market Index

Large-Cap Value: Dodge & Cox Stock

Large-Cap Growth: Growth Fund of America

Mid-Cap Growth: Bridgeway Aggressive Growth

Mid-Cap Value: Oakmark

Small-Cap Growth: Managers Special Equity

Small-Cap Value: Fidelity Low-Priced Stock

Tech: Dresdner RCM Global Technology

Buying the Fremont Bond fund is like sitting at the counter of a greasy spoon and seeing Julia Child behind the grill.

Bill Gross, the only fund manager to win Morningstar's coveted Manager of the Year award twice, is the heavyweight champ of the bond world and is best-known for running the broker-sold (PTTAX Quote)Pimco Total Return fund. But since 1994 he and his deep team have run the $874 million Fremont fund, which offers you the same management without a sales charge and with a lower annual expense ratio -- just 0.62%, compared with 0.90% for the Pimco fund and 0.99% for its average peer.

There is a lot of hype surrounding Gross, who oversees a whopping $220 billion in assets, but it's well-deserved. By making modest but prescient sector and interest-rate bets, he and his team have built an enviable track record. Barring any serious blowups, the fund will beat its average peer for the seventh straight year in 2001. The fund tops more than 90% of its competitors over the past one, three and five years, according to Chicago fund tracker Morningstar.

Even more impressive than Gross' returns is the fund's stability. In down months over the past three years, it hasn't fallen further than its average peer. While no fund manager is infallible, it's tough to bet against him.

Ima Winner
	(FBDFX Quote)Fremont Bond	Rank vs. Peers (1=Best, 100=Worst)
1-Year Return	14.6%	7
3-Year Return	6.7	7
5-Year Return	8.8	2
Source: Morningstar. Returns and rankings Oct. 3.

The, um, Loser

The Putnam Income fund has some $2.8 billion in its coffers, but that's an embarrassment of riches.

Loser!
	(PINCX Quote)Putnam Income	Rank vs. Peers (1=Best, 100=Worst)
1-Year Return	12.1%	59
5-Year Return	5.8	88
10-Year Return	7.2	54
Source: Morningstar. Returns and rankings Oct. 3.

The fund's strategy, spreading its assets among quality corporate and government bonds with an occasional foray into junkier debt, sounds OK, but its returns have been consistently underwhelming. The fund trails its average competitor over the past one, three, five and 10 years, according to Morningstar. In fact, it has lagged behind its average peer in each of the past four calendar years.

Past Losers

Core Stock: Dreyfus

Large-Cap Value: Seligman Common Stock

Large-Cap Growth: Putnam New Opportunities

Mid-Cap Growth: Putnam OTC & Emerging Growth

Mid-Cap Value: Alliance

Small-Cap Growth: Alliance Quasar

Small-Cap Value: Prudential Small Company

Tech: T. Rowe Price Science & Technology

Making matters worse, the fund has also been more volatile in tough times, falling further than its average competitor in down months over the past three years.

An optimist halfway through a stiff drink might say manager James Prusko, who's been in charge since February 2000, is turning the fund around. Its 8.8% gain since Jan. 1 does beat the category average.

Then again, Prusko is the fund's fourth manager since 1998, so even if this year's returns have buoyed your confidence, there's hardly a precedent for managers staying put.

From just about any angle, it's tough to argue that this fund deserves a dime when options like the Fremont fund are out there.