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TheStreet Open House

Fidelity Bond Fund Buys Banks, REITs

BOSTON ( TheStreet) -- Fidelity Investments' newest bond mutual fund is finding opportunities in the debt of banks and real estate investment trusts.

David Prothro and Mike Plage oversee the Fidelity Corporate Bond Fund (FCBFX), which was launched last month.

Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

Why is Fidelity starting a corporate bond fund now in what many analysts say is a rising interest-rate environment?

Plage: Fidelity currently offers investment-grade bond funds that invest in the entire market, as well as those that focus on specific underlying sectors or maturity ranges. With this new fund, we're now offering investors targeted exposure to corporate bonds, which represent about 20% of the investment-grade bond market. Through the fund, investors and advisors will gain access to the debt of many of the largest and most successful companies in America.

While rising rates are a legitimate concern for short-term investors because rising yields generally result in lower bond prices, it's important to keep in mind that corporate bonds' excess yields relative to Treasuries can help to offset potential price declines if interest rates rise.

This is especially true for investors with longer investment time horizons. Compounding income can have a significant impact on total returns. In addition, rising rates are typically associated with an improving economy, which can lead to rising bond prices if company fundamentals improve.

Prothro: I would add that while Treasury rates are currently quite low, corporate bond spreads are wider than historical averages. So, from a relative-value perspective, we view corporate bonds as still attractive, despite the recent decline in credit spreads. When you combine all of these factors, we believe this is a still good time to consider investing in a corporate bond fund.

What investment trends are you following?

Plage: Companies' fundamentals are good, but the economic outlook is somewhat cloudy. So, we're looking for evidence that the U.S. economy has stabilized and the recovery will not get derailed by the European debt crisis. We're paying particular attention to anything that might impact consumer confidence, which will affect companies' willingness to invest.

We're also closely following legislative and regulatory efforts to increase government oversight of the financial sector, which could be a big driver of the credit outlook for the financials. Another trend we're following is the re-emergence of leverage buyout activity, so we're looking for companies that might be affected by that trend.

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