One of the areas of the investment world that has been gaining in popularity in the last five years ...
S&P's Buy-Rated Bond Funds
05/31/2016 9:00 am EST
While most investors still favor actively-managed bond funds, the passive share of fixed-income assets increased from 19% in 2013 to 27% as of the end of March 2016, according to Morningstar, explains S&P analyst Todd Rosenbluth in Standard & Poor's Marketscope.
As S&P Global Market Intelligence has repeatedly noted, the benefits for passive against the average active mutual fund include stronger historical performance and lower costs. But investors favoring active management can try to have their cake and eat it too, if they do their homework.
Putting performance and costs together, there are 24 non-institutional class core bond mutual funds in our database with a three-year total return in the top quartile and with a below-average expense ratio.
Three quarters (18) of them are ranked either five or four star (our buy ratings) by S&P Global Market Intelligence, which should not be a surprise given that these two metrics are significant drivers of the ranking along with credit quality, 30-day SEC yield, and standard deviation.
Some of these highly ranked mutual funds are passively managed, such as the 5-star Vanguard Intermediate-Term Index (VBILX), which costs 9 basis points.
But for those seeking active funds, the 5-star Dodge & Cox Income Fund (DODIX), the 4-star Fidelity Total Return Bond (FTBFX), and the 4-star Vanguard Intermediate-Term Investment-Grade (VFIDX) are all worthy of consideration.
VFIDX is the cheapest, 10 basis points, and best performer on a three-year basis through May 6th, 3.12%, of the trio; the average core bond fund was up just 1.90%.
VFIDX's outperformance of its peers in four of the last five calendar years and an above-average 30-day SEC yield contribute to our favorable view of the fund.
But there are some risks to this actively managed Vanguard fund. VFIDX takes on some additional credit risk, through A- and BBB-rated or equivalent bonds, then its peers. In addition, the fund's standard deviation is relatively high.
Meanwhile, DODIX costs 44 basis points and generated a three-year total return of 2.58%. The fund's credit ratings are more bar-belled than VFIDX and peers, with more exposure in AA- and BBB-rated bonds, but less in A-rated bonds.
The fund outperformed its peers in three of the last five calendar years and has below-average volatility.
Lastly is FTBFX, which costs 45 basis points and rose 2.39% in the three-year period.
Similar to VFIDX, FTBFX has more BBB exposure than its peers and higher standard deviation, but this is partially offset by an above-average 30-day SEC yield. The fund outperformed its peers in four of the last five calendar years.
By Todd Rosenbluth in Standard & Poor's Marketscope
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