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TheStreet Open House

Shifting Away From Junk Bonds

Rivelle said that the securities remain undervalued and should continue rallying.

"With the non-agency mortgages, you have the potential to get high single-digit returns and possibly double-digit returns," Rivelle said.

Another manager who has shied away from high-yield issues is Steve Smith, portfolio manager of Legg Mason BW Global Opportunities Bond (GOBSX). After markets began recovering from the financial crisis, Smith held a big stake in corporate bonds, including high-yield issues. But lately he has shifted almost entirely away from corporate issues. A global manager who is free to invest anywhere in the world, Smith has been shopping in troubled countries of Southern Europe.

"We have been selling expensive corporate issues and buying Portuguese bonds that were yielding 9.5%," he said.

The shift to Portugal might seem like an unlikely move, but Smith has made a career of going against the crowd. His fund currently has 4% of assets in Malaysia and 3% in Hungary. The portfolio has only small holdings in developed countries such as Japan and Germany.

The contrarian moves have often paid dividends. During the past five years, the fund returned 7.9% annually, topping its average peers in the world bond category by almost 3 percentage points. Smith argues that the Portuguese issues represent good values. The securities are rated BB, one step below investment grade.

Curtis Mewbourne, portfolio manager of PIMCO Diversified Income (PDVAX), ranges around the globe, holding a mix of U.S. and foreign bonds. Lately he has been shedding high-yield bonds and shifting to securities from the emerging markets. Holdings include bonds from Russia and South Africa. The wide-ranging approach has enabled the fund to return 8.5% annually during the past five years, outdoing 76% of multi-sector bond competitors.

Mewbourne particularly likes Brazilian bonds. While the country has an inflation rate of 6.5%, the bonds yield 11%.

"Brazilian yields have increased substantially in the last six weeks, and the country has sound credit fundamentals," he said.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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