Stocks have bucked like a mechanical bull turned up too high this year, shaking a fair amount of change from your pockets. So let's check out the market's less scary alternative: bond funds.
Why bother with bonds? Even though they typically return less than an investment in stocks, over time they've reduced a portfolio's volatility more than they've reduced its returns.
That probably doesn't sound like a bad proposition to many shareholders in last year's growth fund darlings who are now on the mat. The average big-cap growth fund is down more than 7% and the average technology and telecommunications sector funds are down more than 11% and 20%, respectively, according to
. These losses wouldn't have been so painful if you'd kept at least a modest amount of your portfolio in bonds.
But how do you find a good bond fund? This week
Center for Investment Research published a report that essentially confirmed the conventional wisdom about which three variables can best help you find a solid bond fund: Performance, risk and expenses, which can take a big bite out of returns.
With that in mind, let's look at three categories of bond funds: intermediate-term bond funds, multisector bond funds and high-yield bond funds. In each case we'll sift the category for a handful of funds with low expenses, low risk, and solid performance vs. their peers.
Intermediate-Term Bond Funds
These funds typically invest in high-quality
government bonds or
mortgage-backed bonds -- or a blend of all three. They are the vanilla core bond funds that can be a truly calming influence on your portfolio.
We've screened the category for funds that beat three-quarters of their peers over the last one-, three- and five-year periods with less risk than the average fund in their category, according to
. To make the cut, funds also needed an expense ratio below the category's 0.97% average and a manager who'd been at the helm for at least five years. Here are the top five, ranked by one-year return.
Pimco Total Return, the fund at the top of the list, lords over the others a bit. That's because it's run by bond guru Bill Gross and his crack team. They've consistently managed to trounce their competitors without subjecting shareholders to significant volatility along the way.
Two intriguing funds you won't find on our list are
Dodge & Cox Income -- a great fund whose one-year rank vs. its peers just missed the mark -- and
Vanguard Total Bond Market Index. The Vanguard fund cleared every hurdle, but its risk scores just missed the mark. It tracks the
Lehman Brothers Aggregate Bond Index
and sports a minuscule 0.2% expense ratio.
Multisector Bond Funds
Multisector bond funds, also called strategic income funds, are a bit more aggressive than intermediate-term funds. These funds are essentially the one-stop shopping choice for more aggressive investors, since they typically spread their assets among high-quality corporate bonds, lower-quality
high-yield bonds and foreign bonds. Since high-yield bonds and foreign bonds can be riskier than higher-quality corporates, these funds gun for higher returns, but typically take on some additional risk.
To come up with a handful of multisector bond funds, we had to loosen our criteria slightly. We screened for funds that have beaten two-thirds of their peers over the last one- and three-year periods with less volatility than their average competitor. They also had to have an expense ratio below the category's 1.41% average and a manager who has held the fund's reins for at least three years.
You might be shocked to see the name "Janus" on this list -- given the firm's reputation as a growth fund manager -- but bond fund manager Ron Speaker has a solid track record, too. The two funds on the list are essentially clones of the same strategy, as you might imagine the "Adviser" fund is sold through investment advisers while the
Janus Flexible Income fund is sold directly to investors.
With a somewhat conservative bias toward U.S. bonds, Speaker has managed to build a solid track record with less risk than many peers.
Fidelity Advisor Strategic Income might also be worth a look for investors who work with an adviser, given the giant Boston fund shop's deep bench of fixed-income analysts supporting John Carlson, who's run the fund since 1996.
High-Yield Bond Funds
For the aggressive investor, a high-yield bond fund might be worth a look as long as you also own less aggressive bond funds. High-yield funds tend to focus on bonds that offer above-average interest payments because the company issuing the bond has a checkered credit history, adding a healthy dose of risk to the investment.
Here we sifted the category to single out funds that have beaten 75% of their peers over the last one-, three- and five-year periods, with a manager who'd been at helm for at least that long. To qualify for our short list, funds also had to be less volatile than their average peer and to have an expense ratio below the category's 1.3% average. Here are the top five funds that made the cut, ranked by their one-year returns.
Among the five funds you'll find another Pimco fund,
Pimco High-Yield. Ben Trotsky is in charge there and he follows a less aggressive approach than his peers, favoring higher-rated junk bonds.
You'll also notice another low-cost Vanguard fund,
Vanguard High-Yield Corporate, but this one isn't tied to an index. Wellington Management's Earl McEvoy has run the fund since 1984, charting a successful course without throwing caution to the wind. Its expense ratio is just 0.28%.
A high-yield fund that's also solid but missing from our list because of its merely average one-year return is
Invesco High-Yield. Jerry Paul has run the fund since 1994, and though he isn't afraid to be aggressive, his fund hasn't been too volatile. That approach earned him Morningstar's Fixed-Income Manager of the Year Award last year.
There you have it, a few short lists to pick over if stocks' shaky year has piqued your interest in bonds.