In the turmoil of 2008, high-yield bonds and convertibles were crushed as investors dumped risky assets and shifted to the security of high-grade bonds. The Delaware managers scooped up depressed assets, putting half the portfolio in high-yield bonds and convertibles. As the securities rebounded, the managers trimmed their positions. The fund currently has 29% of assets in convertibles and high yield. Most of the rest of the assets are in dividend-paying stocks and cash.

In its fixed-income portfolio, Sentinel Balanced holds a mix of high-yield and investment-grade bonds. To protect the portfolio from rising rates in 2013, the fund managers kept 14% of assets in cash, which pays skimpy yields but holds it value. In addition, Sentinel used Treasury futures and other derivatives. By selling the futures short, the fund can produce profits when Treasuries fall. During the past five years, Sentinel returned 14.0% annually, outdoing 62% of peers.

Portfolio manager Jason Doiron says that interest rates could continue rising as the Federal Reserve tapers its stimulus program.

"To navigate the bond markets going forward, it will be prudent to use derivatives," Doiron says.

At the time of publication, Luxenberg had no positions in funds mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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