Investors often ask me how to build a portfolio that holds its own in down times but hands them soli...
A Trio of Bond Fund Favorites
07/06/2015 9:00 am EST
This week we’re reviewing our three bond funds. In each case, our goal is to find those that get as much yield as is prudently possible for their categories, explains Bob Frick in Personal Finance.
Each of these funds have the track records and management that indicate their fine performance will continue.
Osterweis Strategic Income (OSTIX)
In this era of low interest rates, bond funds don’t capture investors’ imaginations, but nobody should scoff at a 5.5% yield.
True, the eclectic and somewhat quirky Osterweis Strategic Income is a high-yield fund, but it’s markedly less volatile than a typical junk fund.
The four-person management team, led by Carl Kaufman, who started with the fund in 2002, minimizes risk by picking high-yield instruments where the businesses are improving.
And the team has an impressive record of picking correctly: The fund has never held a bond that defaulted.
Three-quarters of its bonds will mature in one to five years, which is markedly less than its category average.
So, with its high yield, diversification, ability to avoid defaults, and good position to maintain value as rates rise, we are standing pat on Osterweis Strategic Income.
Vanguard High-Yield Tax Exempt (VWAHX)
If you’re blessed to be in a high enough bracket to need relief from the taxman, we recommend Vanguard High-Yield Tax Exempt.
The fund isn’t as risky as you’d think for a junk bond fund. But you shouldn’t mistake this for a safe and secure muni fund. It is about 20% more volatile than the Barclays Municipal Bond Index.
For that risk you’ll receive an average annualized return that is one percentage point above that index and a yield that’s currently 3.7%.
Unlike the Osterweis fund, the Vanguard fund’s duration is longer than its peers, boosting its return. But when interest rates start rising, the fund’s value will drop more than competitors’.
But keep in mind that fund prices recover over time as new bonds are cycled into a portfolio.
So although rising rates will ding fund shares more than the average fund of its type, Vanguard High-Yield Tax Exempt should continue generating an attractive yield and long-term will be a superior investment overall.
Vanguard Intermediate-Term Investment Grade Bond (VFICX)
For relative safety and a decent yield, you’ll need an efficient fund with a tried and true strategy. With that in mind, we recommend Vanguard Intermediate-Term Investment Grade Bond.
The fund closely tracks the Barclays US Credit 5-10 Year Index but is weighted toward groups within that index that the fund’s managers believe will outperform.
And it does beat that index, as well as the broader, more widely followed Barclays US Aggregate Bond Index, by 1.5 percentage points on an average annualized basis.
For that return you will see more volatility than the indexes, but the volatility of both the Barclays indexes and the Vanguard fund are low.
Its sensitivity to rates is about average for its category. Yielding around 3%, Vanguard Intermediate-Term is the smart choice for yield plus safety.
More from MoneyShow.com:
Related Articles on FUNDS
Real estate investment trusts (REITs) have been in a trading range the last couple of months, but th...
What a great few days at MoneyShow San Francisco! The show was larger than it had been in several ye...
In 2017 it looked like international equities might make a comeback after 6-7 years of lagging the U...