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| Kiplinger's Mutual Fund Guide
Understanding the ins and out of mutual funds will help you become a smarter, better investor. Take a look at these stories from the latest Kiplinger's Mutual Funds special issue. A Plan for Achieving Your Goals 8 Virtues of Great Funds Thinking Outside the Box Breaking Up Is Hard to Do Real Simple Investing |
Here's how it works: Manager Christine McConnell invests in bank loans whose interest rates vary with changes in the general level of short-term rates. Consequently, McConnell's fund collects more interest payments as rates rise. The rate adjustments also enable the bank loans to maintain their values. By contrast, bonds generally lose value when rates rise. As a result, the fund's price tends to remain remarkably constant. Floating Rate yields 5.4% and gained an annualized 5% over the past three years.
But don't confuse Floating Rate with a money-market fund. It invests in low-quality "junk" loans, meaning there's always the danger that a borrower may not repay its debts. But holders of bank loans stand first in line, ahead of almost all other creditors, including bondholders, in the event an issuer defaults.
McConnell, who has been investing in junk debt for 20 years, says she's "paid to be pessimistic." That is, she conjures up worst-case scenarios for the companies whose debt she buys and then tries to determine the likelihood of those scenarios occurring. Since she started running a broker-sold version of Floating Rate six years ago, it has experienced only two "unexpected bankruptcies."
In general, we prefer funds that invest in medium-maturity bonds, are run by experienced managers and charge below-average fees. Dodge & Cox Income (DODIX) meets all three of these criteria. The fund earned 2% in 2005 -- a smidgen less than the return of the Lehman Brothers Aggregate Bond Index. Over the past ten years, though, it ranks among the top 10% of funds that specialize in high-quality taxable bonds, with an annualized return of 7%.
The fund's nine managers are first and foremost bond pickers. While they make interest-rate forecasts, they devote most of their efforts to researching companies and searching for attractively priced bonds. Adding to the fund's appeal: low expenses of 0.44% per year.
The story is similar at Fidelity Intermediate Municipal Income (FLTMX). Manager Doug McGinley and his colleagues don't make big bets on the direction of rates and look mostly for high-quality tax-free bonds trading for less than they think they're worth. Over the past ten years, the fund returned an annualized 5%, besting 90% of medium-term muni funds. It charges 0.43% annually.
Bill Gross, the head bond honcho at Pimco, one of the nation's most prominent fixed-income managers, is the closest thing to a bond superstar. Harbor Bond (HABDX), which Pimco manages, returned an annualized 7% over the past ten years and hasn't finished in the bottom half of its peer group -- intermediate-maturity taxable bond funds -- since 1994.
Truth be told, Gross's moves in managing Harbor Bond are nowhere near as bold as his occasionally cataclysmic pronouncements. (For example, speaking of the U.S., he recently said that "we have exhausted our savings, lost our competitive edge and squandered our educational heritage.") He doesn't extend or shrink maturities in Harbor Bond by large amounts. And although the fund has profited lately from holdings in emerging-markets and inflation-indexed bonds, its holdings in nontraditional areas have been modest.
If you want an adrenaline rush from bonds, look to Dan Fuss and Kathleen Gaffney, who run Loomis Sayles Bond (LSBRX). Fuss and Gaffney typically stash about 35% of assets in junk bonds, including low-grade corporate IOUs and debt issued in developing markets. The pair roam wide in their pursuit of undervalued bonds and even currencies.
Yes, this is wild stuff for supposedly sedate bonds. But the managers have justified the risks they take by delivering solid returns. The fund gained 7% over the past year, aided by a big stake in emerging-markets bonds. Over the past ten years, it gained an annualized 10% -- more than three points per year ahead of the Lehman index. In the bond arena, that's a huge edge.
By the numbers: Key information about the Kiplinger 25
The raw returns are just a starting point in our assessment of the Kiplinger 25. We also look at how funds perform against their peers and whether their results justify the risks they take.
U.S. Stock Funds
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Data is to March 1, 2006. --Not available. *Limited or no availability through discount brokers. Source: Copyright © 2006, Standard & Poor's, a division of The McGraw-Hill Companies, Inc. All rights reserved.
International Stock Funds
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Data is to March 1, 2006. --Not available. *Limited or no availability through discount brokers. Source: Copyright © 2006, Standard & Poor's, a division of The McGraw-Hill Companies, Inc. All rights reserved.
Bond Funds
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Data is to March 1, 2006. --Not available. **For the older, institutional class, which has a higher minimum investment and lower operating expenses. Source: Copyright © 2006, Standard & Poor's, a division of The McGraw-Hill Companies, Inc. All rights reserved.
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