Bond-Fund Managers Take on More Risk

To make sure the corporate bonds can survive any market turmoil, Quigley says he's sticking with high-quality issues. "We want the kind of bonds that let you sleep at night," he says. "These are companies that have been through troubled times before and survived."

A favorite issuer is Comcast(CMCSA Quote), the cable-TV giant. Quigley says consumers may be shopping less these days, but they are reluctant to do without their cable service. Another favorite issue is from Johnson & Johnson(JNJ Quote). The health company has a strong balance sheet that should survive the recession.

While many funds take on more risk by buying bonds with lower credit qualities, Osterweis Strategic Income follows a different route. When manager Carl Kaufman becomes worried about unsettled bond markets, he buys short-term securities. Such debt rarely defaults, and it suffers only limited losses when interest rates rise. Short-term bonds typically pay meager yields. To boost results, Kaufman often buys short-term junk bonds, which have recently paid double-digit yields.

In 2008, Kaufman became extremely defensive, holding securities with maturities of one year or less. The strategy worked. The fund suffered only limited damage during the bond collapse of last year, returning 2.6% for the past 12 months and outdoing 95% of multisector bond funds.

Lately, Kaufman has turned more aggressive. He has been buying bonds with three-year maturities. "We have gone from being extremely defensive to taking on more risk," Kaufman says.

To manage default risk, Kaufman sticks with solid companies that have a lot of cash on their balance sheets and are generating free cash flow. A favorite holding is a bond from software maker Novell(NOVL Quote). The company has $1 billion in cash and only $121 million in debt. "I am not interested in distressed debt," Kaufman says. "I am interested in getting double-digit yields from high-quality issuers."