Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strategy was to reduce the twin bond risks of credit and interest rates, asserts mutual fund expert Jack Bowers, editor of Fidelity Monitor & Insight.
Relative to most other bond funds, Limited’s interest-rate risk is, well, limited! With a duration of 2.5 years it has less rate-risk than Fidelity’s other intermediate funds but more than most short-term funds.
Primarily an investment-grade fund, it reaches a bit for yield through its 78% stake in corporates (which yield more than comparable government bonds). The latter comprise just 4% of its assets.
This mix, which is orchestrated by the fund’s three-person manager team, has provided Limited Term with a modest performance boost this year. In fact, as rates rose across the yield spectrum, its shorter duration helped to make it one of Fidelity’s betterperforming taxable bond funds.
Limited is roughly flat for the year, whereas U.S. Bond Index, a proxy for the broad taxable market, is down 1.8%.
Before Fed Chairman Powell’s “dovish” remarks about interest rates late last month, the fund’s managers had anticipated that 2019 would look much like 2018 — meaning more rate hikes. But they also saw a chance that investors would start to worry about a slowing economy later next year, which could blunt rising rates anyway.
As Limited Term is actively run, we expect its managers to modestly shift its composition as conditions warrant. And as for the trade, given all the uncertainty surrounding Fed monetary policy, right now, ’tis better to be safer than sorry.
