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Six Bond Funds With Consistent 'Real' Returns

Surprisingly, very few bond funds consistently produce returns in excess of the inflation rate. We found six that do, and one that has done it for each of the past dozen years.

With a total return of 0.36% in 2008, the

Colorado Bond Shares Tax-Exempt Fund

(HICOX) - Get Colorado Bond Shrs Tax-Exmt A Report

deserves 12 cheers.

While the fund's fractional gain might not seem impressive at first glance, it was higher than the

2008 inflation rate

of 0.1% the government announced Friday. By besting the CPI, HICOX was able to produce a positive "real" annual return for its holders. Its return in 2007 also surpassed the gain in the consumer price index, as it did in the previous year, and the year before that, and again and again and again.

In fact, the double-tax-exempt HICOX turns out to be the only fixed-income fund in Ratings' database to have achieved 12 consecutive annual returns, besting the corresponding gains in the CPI. Its singular achievement is summarized in the table below.

An investor in search of a bond fund consistently producing gains exceeding the annual inflation rate will find that the quest is anything but a slam dunk. It turns out that even with supposedly steady fixed-income funds, lengthy annual strings of positive "real" returns are surprisingly elusive.

While the remarkable HICOX has outpaced inflation over each of the past dozen years, a parsing of the thousands of bond funds in Ratings' database could not find one other that has performed the same trick for even the past 10 years. But that could change by the end of this year, as the five funds in the second accompanying table have now strung up nine straight years of gains exceeding inflation's annual erosion of purchasing power.

Including the steady HICOX, Ratings "CPI Busters" presents an interesting mix of bond funds.

SHORT-TERM TREASURY NOTES: American Century Target Maturity - 2010


invests only in zero-coupon U.S. Treasury securities and U.S. Treasury bills, notes and bonds that will mature in 2010. The fund adjusts to maintain the duration of its holdings so that it falls within the year 2010 and may take advantage of disparities in prices and yields. The fund will be liquidated at the end of 2010.

BTTNX achieved double-digit percentage gains in 2000, 2001, 2002 and 2008.

GLOBAL BONDS: Dreyfus Standish Mellon Global Fixed-Income

TheStreet Recommends

(SDGIX) - Get BNY Mellon Global Fixed Inc I Report

normally invests at least 80% net assets in U.S. dollar and non-U.S. dollar denominated fixed-income securities of governments and companies located in various countries, including emerging markets. It generally invests in eight or more countries, but always invests in at least three countries, one of which may be the U.S. At times, the fund may invest a substantial part of its assets in any one country.

INTERNATIONAL BONDS: Dreyfus Standish Mellon International Fixed-Income


, unlike SDGIX, above, targets the world outside the U.S. rather than the world including its home country. It normally invests at least 80% of net assets in fixed income securities. It also normally invests at least 65% of net assets in non-U.S. dollar denominated fixed income securities of foreign governments and companies located in various countries, including emerging markets. The fund always invests in at least five countries other than the U.S. At times, It may invest a substantial part of its assets in any one country.

SHORT & INTERMEDIATE GOVERNMENT BONDS: The ISI North American Government Bonf Fund


normally invests at least 80% of its assets in a portfolio of investment grade bonds issued or guaranteed by the governments of the U.S., Canada and Mexico. Thus, it offers a degree of international diversification while staying with government bonds that are of higher risk than U.S. Treasuries but generally more secure than corporate bonds.


(VBLTX) - Get Vanguard Long-Term Bond Index Inv Report

tracks the performance of the Barclays Capital U.S. Long Government/Credit Bond Index, a market-weighted bond index that includes investment-grade bonds with a dollar-weighted average maturity of 15 to 30 years.

Those who doubt the efficacy of index funds should take note that the VBLTX has been the only long-term general bond fund to consistently produce inflation-beating returns so far this century.

And those subject to trivializing the attritional impact of mutual fund expense ratios should note that at 0.18%, VBLTX sports the lowest annual total expense ratio of any fund on the list.

SINGLE-STATE MUNICIPAL BONDS: Colorado Bond Shares Tax-Exempt

shields its holders from federal as well as Colorado income taxes on its dividends. Because of their tax-exemption benefits, muni funds normally produce subdued performances relative to other forms of fixed-income funds. That makes the 12-year CPI-thumping record of HICOX all the more impressive.

Richard Widows is a senior financial analyst for Ratings. Prior to joining, 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.