6 Funds That May Defy Bond-Market Downturn

BOSTON (TheStreet) -- Bond mutual fundsb kept investors from losing money during the stock-market crash of 2008 and have delivered large gains since equities bottomed out two years ago.

Still, investors have dumped bond funds in favor of stock funds in recent months amid signs global economic growth is accelerating, threatening to fuel inflation.

Bond funds, in fact, lost money late last year, due to a rise in interest rates, which occurred after the Federal Reserve actually tried to keep rates low with its second installment of quantitative easing, dubbed QE2. For example, multi-sector bond funds, which have the freedom to go into any area of the fixed-income market, lost 1% late last year, according to Morningstar.

That sent investors packing.

But now, it appears safe-haven bond-buying is picking up again, given the prospect of continued turmoil throughout the Middle East and the weak dollar.

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Investors have been selective, however, and money flows into bond funds have jumped and then faltered from week to week.

Fund-flows tracker EPFR Global reported that, for the week ending Feb. 23, flows into bond funds hit a 15-week high, "with U.S. bond funds having their best week since late October."

And last week, Lipper reported that investors are favoring high-grade U.S. corporate bonds, adding $114 million and bringing inflows this year to $400 million in the category. That's a turnabout from last year, when investors redeemed $300 million in the fourth quarter.

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A bond fund's category makes a big difference in its appeal to investors, but finding the right one is a daunting task.

Pimco Investments, the investment house known for its bond expertise, said in a February advisory on its Web site that "successful bond investing now means seeing the bond market as a colossal $90 trillion global supermarket containing many different aisles, with sources of value located literally throughout the world."

Morningstar tracks 13 fixed-income funds. The top performer this year is high-yield bond funds, with a 3.6% return, including 1.1% in the past month. Second is the bank loan bond category, with a 2.3% return.

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Over the past month, inflation-protected bond funds, known as TIPS, have gained 1.4%, by far the biggest return in the period.

The S&P 500 Index is up 6.2% this year. A fixed-income investment benchmark, the Barclays Capital U.S. Credit Index, is down 0.26% so far in 2011, but up 4.2% over the past 12 months.

For now, investors appear to be seeking the safety they perceive in high-quality U.S. corporate bonds as the economy recovers. Returns have been a solid 8.95% over the past 12 months, Lipper said.

Here are six bond funds that offer diversity, reliability and relatively strong returns:

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