An unfunny thing happened to "inflation-protected" bond funds in 2006. Many of them didn't.
Not only did a significant number of these funds fail to deliver returns sufficient to maintain positive constant-dollar returns; a number of them suffered outright losses on a nominal basis.
TheStreet.com Ratings' list of the worst-performing bond funds for 2006 includes a dozen funds, such as
DWS Inflation Protected Plus , down 2.17%,
MFS Inflation Adjusted Bond , down 0.79%, and
PL Inflation Managed , down 0.48%, whose names imply that they will produce real returns.
Many of these funds invest in Treasury Inflation-Protected Securities, or TIPS. The principal value of these bonds increases or decreases to compensate for changes in the consumer price index. They were hit in the second half of last year when inflation actually fell. The principal of some of these bonds fell so much that it more than offset the interest they were paying out.
If bond funds that invest in TIPS can't produce real returns, where can you find them? I searched TheStreet.com Ratings' database for funds whose returns have consistently outpaced of inflation, as measured by the consumer price index, not only in 2006 but for each of the past 10 calendar years.
The printout was not exactly something that would raise the hackles of environmentalist concerned about deforestation. Of 5,868 bond funds tracked by TheStreet.com Ratings -- of which 2,737 have a track record of 10 years or more --only four fit the bill. (TheStreet.com Ratings counts each share class of a fund as separate fund.)
The list contains some surprises. High fees tend to eat into returns, but the
Calvert Income Fund returned an annualized 9.5% a year over the past 10 years, compared with 2.44% for the CPI. Yet the investment grade bond fund's total expense ratio of 1.20% is nearly a half-percentage point higher than the average of its fellow inflation-beaters.
Municipal bonds aren't excactly known for their outsized returns, either. In fact, yields on tax-exempt muni bonds are almost universally lower than other classes of bonds, although in recent years the asset class has benefited from hedge funds' buying, pushing prices higher. Nevertheless, it's remarkable that the
Colorado Bond Shares Tax-Exempt Fund's 12-month dividend yield of 4.59% is higher than two of the other funds on this list.
The talented fixed-income fund managers from Loomis Sayles captured two spots on the CPI-beaters podium. The
Loomis Sayles Bond Fund turned in double-digit total returns during five of the last 10 calendar years, and led the pack for 2006 with an impressive total return (price appreciation with the assumption of dividend reinvestments) of 10.99%.
Loomis Sayles Fixed Income Fund, with a $3 million minimum initial investment, is for big players only. But the fund leads the group in compound annual returns for the latest three, five and 10 years. It achieved double-digit gains in five of the past 10 calendar years, including a 30.15% surge in calendar 2003.
10 Years of Real Returns
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Richard Widows is a financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.