Saturday Screen: Multisector Bond Funds to Soothe Your Upset Portfolio

Tums, I mean, bonds anyone?

This week stock prices were about as stable as Peter Lorre in Casablanca, so you might be thinking about building up (or starting up) the bond portion of your portfolio.

Why bother with bonds, you ask? Because although they typically return less than stocks, they can reduce a stock portfolio's overall volatility more than they reduce returns. That can save you a few gray hairs during a hectic week like this one and during longer downturns as well.

Even though bonds can be a valuable cushion, let's face it, they're still a tough sell. Buying individual bonds is often more expensive and complicated than stocks -- with less of a payoff. So, unless you're willing to tackle their sometimes dizzying intricacies, a bond mutual fund is probably the answer.

But which kind?

Most bond funds are coming off a lousy year. Rising rates often sucker-punch bonds, so last year many bond funds ended up under water while the average domestic stock fund was up more than 24%, according to Lipper.

There are many flavors of bond funds that slice up the U.S. government, U.S. corporate and international bond markets by both credit quality and duration. (We're saving municipal bonds for another day.)

Rather than pick many funds or bet the farm on one bond sector, the "one-stop shopping" answer for stock lovers is a multisector bond fund (often labeled "strategic income"). In one fund, you get a pro spreading your money among U.S. government, U.S. corporate and foreign bonds, focusing on the best sector at any given time.

That diversification can help smooth out volatility. Last year, the average multisector fund posted a 2.6% return, compared with a 0.5% return for the average domestic bond fund, according to Lipper.

So, this week's Saturday Screen sifts the category, looking for funds that have outperformed their peers over the past one- and three-year periods. To make the cut, funds also had to have a manager who has been at the helm for at least three years, and below-average expenses. Here's the eight that made it, ranked by one-year return.

Tums For Your Portfolio Top performing multi-sector bond funds
Fund	1-Yr. Return	3-Yr. Annualized Return
(NEFZX Quote)Nvest Strategic Income	8.7%	7.6%
(MFIOX Quote)MFS Strategic Income	6.2	5.5
(SSTAX Quote)Salomon Brothers Strategic Bond	4.7	6.1
(FSIAX Quote)Fidelity Advisor Strategic Income	4.2	6.5
(OPSIX Quote)Oppenheimer Strategic Income	4.4	5.2
(NARAX Quote)Phoenix-Goodwin Multi-sector	4.1	5.2
(JHFIX Quote)John Hancock Strategic Income	2.1	7.8
(ATSAX Quote)Atlas Strategic Income	1.9	5.5
Source: Morningstar. Performance as of April 6.

Let's start at the top with (NEFZX Quote)Nvest Strategic Income, previously called New England Strategic Income.

A big plus is the fund's marquee management team. Dan Fuss and Kathleen Gaffney, two Loomis Sayles bond managers, have sub-advised the fund since 1995 and 1996, respectively. Fuss is a bond-investing legend and former Morningstar Manager of the Year. He manages several funds that focus on different sectors, but this is his only multisector charge.

The two have kept the fund ahead of their peers over their tenure, but they've taken a fairly aggressive route to those results. For the past two years, they've put a significant focus on high-yield and emerging-markets debt -- the fund's average credit quality is below investment grade.

That approach worked well last year, and so far this year, but it can be a rough ride. In 1998, the fund lost 7.4% in the third quarter, en route to a negative 0.7% return for the year.

The same can be said for most of these funds. They typically maintain a variable core of U.S. government bonds to reduce risk, and use the rest of the portfolio to dabble selectively in lower-quality issues at home and abroad to boost returns and yield. (MFIOX Quote)MFS Strategic Income, for instance, had more than 40% of assets invested in U.S. high-yield and emerging-market bonds at year-end.

If you'd like a less risky fund, you might consider (JHFIX Quote)John Hancock Strategic Income or (ATSAX Quote)Atlas Strategic Income. Both currently have the biggest stakes in U.S. government bonds and sport investment-grade average quality. That said, both funds easily could load up on riskier bonds, too.

If you're looking for an even less risky fund, Morningstar analyst Sarah Bush points to (PTTAX Quote)Pimco Total Return, run by bond king William Gross (another former Morningstar Manager of the Year). It's categorized as a domestic, intermediate-term fund and thus didn't make our multisector-fund list. The fund focuses primarily on investment-grade domestic bonds, posting decent returns with low volatility. It's broker-sold, but you can skip the sales charge by looking at (FBDFX Quote)Fremont Bond or (HABDX Quote)Harbor Bond, two no-load funds Gross manages in the same style.

While we're on the subject of sales charges, because bond-fund returns are typically more modest than stock-fund returns, low expenses are key. While all of the funds on our list have below-average expenses, all but Atlas Strategic Income charge a front- or back-end load, or sales charge. The three funds with the lowest expense ratios are those from Atlas, MFS and Hancock, which have annual expense ratios ranging from 0.8% to 0.89% annually.

You can get around (FSIAX Quote)Fidelity Advisor Strategic Income's load by considering (FSICX Quote)Fidelity Strategic Income. The fund is essentially run the same way by the same management team, but missed our cut because it doesn't have a three-year record yet.

Another no-load option is (JAFIX Quote)Janus Flexible Income (yes, an income fund from the growth-fund titan). Manager Ron Speaker, who has done a commendable job since taking the reins in 1997, focuses almost exclusively on the U.S. That held the fund back last year (keeping it off our list), but could lead to less volatility over the long term. The fund sports a low 0.81% expense ratio, and its 7.5% annualized return over the past three years beats 93% of its peers.

If you want to pay as little as possible, consider (VBMFX Quote)Vanguard Total Bond Market Index, which tracks the Lehman Brothers Aggregate Bond Index, a broad basket of mostly investment-grade domestic bonds. Like Pimco Total Return, this fund is classified as a domestic, intermediate-term fund, so it didn't make the list. But it will probably have tamer returns than most multisector bond funds, and you can't get much cheaper than its 0.2% expense ratio.