Income Guru's Bond Fund Trio

12/14/2016 7:00 am EST

Focus: FUNDS

Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

President-elect Trump’s promise cut taxes and roll back regulation has pushed the stock market to all-time highs while bonds have retreated on fears of rising inflation and higher interest rates, observes Roger Conrad, editor of Capitalist Times.

Bond market turmoil also has erased most of this year’s gains in in some of our favorite bond funds. Aberdeen Asia-Pacific Income (FAX) still shows a year-to-date total return of 12.2 percent. But that’s about 10 points less than what it was at the end of August.

PIMCO Strategic Income (RCS) is ahead by about 8 percent for 2016. But that gain is entirely on the strength of its $0.08 per unit monthly dividend, as its price has fallen about 20 percent over the last couple months.

Even the ultra-low-risk Vanguard Intermediate-Term Tax-Exempt (VWITX) has seen its net asset value (NAV) drop nearly 5 percent from an early July high, eroding its year-to-date total return to 0.06 percent.

Despite this slide we remain comfortable holding all three funds. Should inflation pick up next year, we’re likely to see weakness in the US dollar and corresponding strength in currencies of commodity-exporting countries like Australia.

That would benefit Aberdeen Asia-Pacific Income, which holds 30.1 percent of its portfolio in bonds denominated in Australian dollars and another 24.2 percent in currencies of 10 developing countries on the Pacific Rim.

Vanguard Intermediate-Term Tax-Exempt’s worst year in the last decade was 2013, when it was underwater by 1.56 percent.

With more than 5,900 individual bonds in the portfolio, the fund minimizes credit risk with diversification and controls interest rate exposure by focusing on debt maturing in less than five years.

Management maximizes yield by minimizing expenses to just 20 basis points. That limits exposure to further rate boosts, as well as unexpected weakness in the economy.

As for PIMCO Strategic Income, the closed-end fund's premium is now below 13.5 percent, the average value since lead manager Daniel Ivascyn took the helm in May 2005.

That means the market price should again follow the lead of what’s been a stable portfolio of mostly US agency debt. The top three holdings, for example, all mature by the mid-2017, meaning nearly 40 percent of the portfolio has basically no interest rate risk.

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By Roger Conrad, Editor of Capitalist Times

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