Bond Funds That Are Staying in the Black
USAA Intermediate-Term Bond is not reluctant to take contrarian positions. Portfolio manager Matt Freund bought municipal bonds last year after headlines about Detroit's problems unnerved markets. Freund grabbed airline securities when the market was depressed because of fears about bankruptcies. "We become interested in sectors when they are cheap and out of favor," he says.
The bold moves produced solid results last year. During the past five years, USAA Intermediate-Term returned 12.8% annually, outdoing its average peer by six percentage points.
USAA can only hold up to 10% of assets in below-investment grade bonds. These days the fund is near its maximum limit. USAA also has big stakes in commercial mortgage-backed securities and bonds rated BBB-the lowest quality in the investment-grade universe.
Along with Treasuries, many intermediate funds have big stakes in mortgages backed by Fannie Mae and other government agencies. But Pioneer Bond manager Kenneth Taubes has underweighted government issues. Instead, he prefers mortgages that are not backed by agencies. Such private mortgages were pummeled during the financial crisis. Last year, the nonagency mortgages performed well as default rates dropped. "As unemployment comes down, more people are staying current on their mortgages," says Taubes.To provide a broad portfolio, Nuveen Strategic Income holds a mix that includes investment-grade issues as well as high-yield and foreign securities. During the past five years, the fund has returned 13.9% annually. Portfolio manager Timothy Palmer can put up to 50% of the assets in U.S. and foreign bonds that are rated below-investment grade. In 2007, the fund steered away from high-yield bonds because their yields seemed relatively puny. But last year, the fund held nearly its maximum position of high-yield bonds.
Palmer says the credit quality of the high-yield market remains sound. Annual default rates are about 2%, well below the historic average of 4%. High-yield bonds currently yield around 6%. "After the rally of recent years, high-yield bonds are no longer extremely cheap, but the bonds are still attractive compared to the alternatives," Palmer says. At the time of publication the author had no position in any of the stocks mentioned. Follow @StanLuxenberg This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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