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10 Bond-Fund Refuges From Stagflation

The price of petroleum has slipped back in recent days, but talk of stagflation hasn't. According to Google news searches, 3,392 articles mentioned the dreaded "S word" in the week ended July 23, up from an average of 906 for each of the four previous weeks.

The "stag" -- for stagnation -- in stagflation translates into a major detour in the road to corporate profit growth, making equity investments far less likely to pay off. The S word's "flation" suffix -- for inflation -- can prove a killer for hopes of achieving returns on bond funds that exceed the acceleration in the cost of living. Stagflation is defined as a period of rising inflation and sluggish growth.

With the more traditional economic contractions, "cash equivalent" investments such as short-term Treasury bills or money market mutual funds provide refuge from crumbling equity valuations. But stagflation even tarnishes the appeal of money market instruments, as the inflation component of that economic malady can exceed short-term returns, thus eroding their purchasing power.

For those believing that the bear market isn't finished and that stagflation remains a threat, we parsed Ratings fixed-income fund database for bond funds that might insulate investors from the insidious impact of economic stagnation combined with inflation.

Stability and preservation of capital were the primary considerations in filtering the database for open-end bond funds with characteristics would help investors who feel threatened by stagflation:

  • Positive returns for the latest year as well as for the more difficult investment period of 2008 to date (through June 30).
  • Stability, as measured by annualized 12-month standard deviations of returns of less than 2% (which contrasts an average of 2.51% for all bond funds).
  • Current dividend yields of at least 3%, for payouts that stand some chance of neutralizing the erosive impact of inflation.
  • Preservation of principal in order to assure adequate asset bases for payment of future dividends; with the 10 bond funds meeting the above criteria and having the highest 12-month "principal changes" selected for the list.
  • The accompanying list of bond funds meeting the above constraints borders on the extreme of capital preservation.

    Half the listed funds demonstrate their conservative investment postures by including "government" in their respective names. A sixth, the Performance Funds Short-Term Fixed Income Fund (PFSFX) lacks the word in its name, but in fact is 65% invested in short-term government securities.

    Allegiant Ltd Maturity Bond A (AINRX) B 2.08 5.87 1.84 3.46 1.72
    American Century Sh-Term Govt Inv (TWUSX) A * 2.45 6.89 2.58 3.92 1.98
    CNI Charter Government Bond N (CGBAX) B * 1.80 6.23 2.06 3.54 1.85
    Dreyfus Sh-Interm Govt (DSIGX) B+ * 2.36 6.31 2.42 3.19 1.89
    Lord Abbett Invt Tr Sht Dur Inc A (LALDX) B- 2.05 6.39 1.88 4.47 1.68
    MTB Short Duration Govt Bond A (ASTTX) B- 1.95 5.61 1.78 3.49 1.44
    Nationwide Sh Duration Bond A (MCAPX) B 1.83 5.63 1.93 3.25 1.64
    Performance Fds-Short Trm Fxd Inc A (PFSFX) B 1.92 5.93 2.17 3.24 1.78
    Vintage Limited Term Bond Fd (AFTRX) A- * 1.84 6.35 2.23 3.94 1.96
    Wells Fargo Avtg Sh Dur Gov A (MSDAX) B 2.20 6.00 1.73 3.46 1.63
    AVERAGES FOR ABOVE FUNDS 2.05 6.12 2.06 3.60 1.76
    * No front-end sales charge.
    Source: Ratings - Data as of 6/30/2007.
    For an explanation of our ratings, click here.

    Similarly, with the prospect of inflation posing the most threat to longer-term instruments, nine of the 10 funds specifically state in their names that they stand on the short end of the yield curve. The only member of the table without "short" or "limited term" or "limited duration" in its name is the CNI Charter Government Bond Fund (CGBAX), which is, in fact, invested in short and intermediate government notes.

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