Bond Funds for a Low Rate Environment

11/04/2013 9:00 am EST


Looking for bond funds for a low rate environment? In S&P The Outlook, Vaughan Scully of S&P Capital IQ, highlights four funds that stand to benefit if the Fed delays tapering and if interest rates don't start rising.

If US economic growth doesn't pick up and unemployment doesn't come down, the Fed may not begin to taper its bond buying. That could make long-term bond funds more attractive to investors seeking a high level of current yield.

To ferret out the most attractive long-term bond funds, we screened for funds in the Long-Term peer group with a four-star or five-star ranking from S&P Capital IQ. We chose funds that are open to new investors and have no front-end sales load.

From there, we looked for funds that were in the top quartile for performance over the past one-year, three-year, and five-year periods.

Two funds matched that description, and we included two more that were in the top quartile for the one-year, and three-year periods, but don't yet have a five-year track record.

Chou Income Fund (US: CHOIX)

The Chou Income fund is a go anywhere bond fund with a strong track record over its three year life. Indeed, the fund was best performing in both 2012 and 2013 (through October 15) among the peer group.

As a bond fund, its assets are highly concentrated, with only 18 individual holdings, as of August 31, that are on the lower side of the credit quality spectrum: 25% of assets are invested in securities rated B or lower, and the remainder is unrated.

Duration, a measure of sensitivity to changing interest rates, is low at 2.22 years compared with the peer average of 6.10.

Loomis Sayles Bond Fund (US: LSBRX)

The Loomis Sayles Bond Fund, by contrast, is gigantic and more diversified, with 628 individual holdings. It has less exposure to junk bonds, with a 35% limit and about 25% of assets, as of August 31.

More than 20% of assets are rated AAA. Its duration is close to the peer average, and about 20% of assets are invested in foreign government bonds.

Managers Bond Fund (US:MGFIX)

This fund also keeps a 35% cap on non-investment grade debt, but is less diversified, with about 248 individual issues. It also limits non-US dollar holdings to 10% of assets, and its duration of 6.11 is close to the peer average.

Performance Trust Total Return Bond Fund (US:PTIAX)

This fund focuses heavily on total return. In selecting bonds, “we make a forward projection of a fixed-income security's total return characteristics over a variety of interest rate scenarios, yield curve shifts, and time horizons,” the firm says, picking those bonds which have the best risk/reward characteristics.

As of August 31, the fund had 312 different holdings, with slightly more than half, below investment grade. More than half of its portfolio is invested in non-agency residential mortgage bonds, with the remainder in muni bonds and cash.

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