Schwab says that its A-rated picks have outdone the S&P 500 since the scoring system began in 2002. The system favors companies with stable sales growth and rising share prices. Stock buybacks are considered a positive sign, indicating that managements believe their shares are undervalued. "We buy stocks with higher ratings and short stocks with weaker scores," says Vivienne Hsu, a SWHIX portfolio manager. Investors seeking to diversify their bond holdings should consider Gateway ( GATEX). During the past five years, the fund returned 6.56% annually, outdoing intermediate-term bond funds by more than 2 percentage points. In the five-year period, intermediate-term bond funds recorded eight negative quarters. Every time bonds sank, Gateway stayed in the black. Gateway recorded about the same risk levels as intermediate-term funds did as indicated by standard deviation, a measure of how much investments bounce up and down. Gateway holds down risk by following a complicated strategy. The fund starts by buying a stock portfolio that roughly tracks the S&P 500. Gateway then sells call options on the S&P 500. The calls give buyers the right to collect cash if the index rises above a certain level. The call sales provide the main source of returns for Gateway. While the option sales produce varying amounts of income, the annual average is around 20% of the value of the fund's stock portfolio. Gateway takes the cash from the option sales and uses some of it to buy put options. Like short sales, the puts gain in value when the market drops. The puts insure that the fund will suffer only limited losses in downturns. Gateway's stock portfolio by itself can produce only limited gains. If the market appreciates, the value of Gateway's stock portfolio will climb. But most of the profits must go to pay buyers of the calls who earn payments in rising markets. After paying the call buyers, the fund usually has enough money left over to provide shareholders with the kind of single-digit returns that long-short investors appreciate.