Top Bond Funds Aren't for the Risk-Averse - TheStreet

The top-performing sectors for bond funds in the second quarter focused on funds that invested in floating-rate loans and other floating-rate securities, and those that invested in senior secured floating-rate securities.

In general, the mandate of these funds is to seek current income and have capital preservation as a secondary criterion. This obviously isn't the type of fund for risk-averse investors.

These funds are classified as either loan-participation funds or corporate high-yield by ratings classifications used by

TheStreet.com

. The average return for each of these categories was 2.17% and 1.22%, respectively, for the three months ended June 30.

The best-performing funds were the

ING Senior Income Fund

(XSIAX)

(6.11%), the

Eaton Vance Floating Rate Advantage fund

(EAFAX) - Get Report

(5.91%) and the

AIM Floating Rate fund

(AFRAX) - Get Report

(5.73%).

Chasing yield or income on its own, with a secondary commitment to capital preservation, is for a certain type of "opportunistic" investor, given the volatility and uncertainty in markets at present. This is akin to being a fox in a henhouse -- you want to make sure you get out before anyone notices.

Should markets continue to deteriorate, investors who are exposed to these types of funds will be punished for their lack of attention to capital preservation. Also, it's almost illogical at a time like this to be chasing such a low yield of, say, 6% at the risk of a far greater percentage fall in one's capital base. Investors should always look at the risk being taken vs. the potential return.

It would be less risky to chase a lower yield of, say, 4% with far greater capital preservation potential

as offered by utility funds

.

So in the example above, an investor looking to invest in, say, a loan participation fund and chase a 6% yield is taking on a disproportionate level of risk for the additional 2% yield, when there exists a 4% yield in a utility fund that takes income and capital preservation as equal considerations.

Sam Patel, CFA, is the manager of mutual fund research for the TheStreet.com Ratings.

In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

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