>>Stocks to Buy for Third Year of Bull Market Investors have been selective, however, and money flows into bond funds have jumped and then faltered from week to week. Fund-flows tracker EPFR Global reported that, for the week ending Feb. 23, flows into bond funds hit a 15-week high, "with U.S. bond funds having their best week since late October." And last week, Lipper reported that investors are favoring high-grade U.S. corporate bonds, adding $114 million and bringing inflows this year to $400 million in the category. That's a turnabout from last year, when investors redeemed $300 million in the fourth quarter. >>10 Best Dow Stocks Since March 2009 Low A bond fund's category makes a big difference in its appeal to investors, but finding the right one is a daunting task. Pimco Investments, the investment house known for its bond expertise, said in a February advisory on its Web site that "successful bond investing now means seeing the bond market as a colossal $90 trillion global supermarket containing many different aisles, with sources of value located literally throughout the world." Morningstar tracks 13 fixed-income funds. The top performer this year is high-yield bond funds, with a 3.6% return, including 1.1% in the past month. Second is the bank loan bond category, with a 2.3% return. >>Small-Caps With Gains of 15-Fold in Two Years Over the past month, inflation-protected bond funds, known as TIPS, have gained 1.4%, by far the biggest return in the period. The S&P 500 Index is up 6.2% this year. A fixed-income investment benchmark, the Barclays Capital U.S. Credit Index, is down 0.26% so far in 2011, but up 4.2% over the past 12 months. For now, investors appear to be seeking the safety they perceive in high-quality U.S. corporate bonds as the economy recovers. Returns have been a solid 8.95% over the past 12 months, Lipper said. Here are six bond funds that offer diversity, reliability and relatively strong returns:
Loomis Sayles Investment Grade Bond Fund ( LSIIX), which is top-rated by Morningstar with five stars, is a good all-around bet for investors seeking a conservative bond allocation. It has gained 1.5% this year, 10.5% over the past year, and has a three-year average return of 7.7% -- and that was through some rough and rocky times. The fund, with $4.4 billion in assets, invests at least 80% of total assets in investment-grade fixed-income securities and can invest up to 10% of the fund in higher-yielding, lower-rated securities. The fund may invest up to 20% of total assets in foreign securities, including emerging-markets securities. It doesn't hold any equities. Among its largest holdings are government bonds from Canada, New Zealand and Norway and corporate bonds from Intel ( INTC) and Deutsche Telekom ( DT).
Fidelity Strategic Real Return Fund ( FSRRX), a broad market bond fund, gained 17% in the 12-month period through the end of February. It's up 2.8% this year. Morningstar, which categorizes it as a "conservative allocation" fund, gives it a three-star rating out of a possible five. The $4.2 billion fund is a mix of about 30% inflation-protected debt securities, 25% floating-rate loans, 25% commodity-linked notes, 20% real estate investment trusts (REITs) and other real-estate-related investments. A Morningstar analyst says the fund's diversified portfolio, which includes a heavy reliance on U.S. Treasury Inflation-Protected Securities and floating-rate loans, "makes it an intriguing option for fighting inflation."
The $9 billion Oppenheimer Global Strategic Fund ( OPSIX), which gets two stars from Morningstar, is a multi-sector bond fund that divides the fund's assets among U.S. government, high-yield and foreign debt, including emerging-markets issues. It has a 1.76% return this year and 15% over the past year. The fund also uses derivatives for investment purposes or hedging, including options, futures, forward contracts, swaps and "structured" notes. Top 10 holdings includes sovereign bonds from Poland, Turkey, Brazil, Japan and South Africa.
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