investing

Buy These Free-Range Bond Funds

There’s more to bond investing than picking funds that adhere closely to an index or cling to the apparent safety of Treasuries.

Last month I promised to discuss bond funds whose managers aren’t hemmed in by allegiance to an index or the ultraconservative viewpoint that Treasury bonds and notes are the center of the universe. As I wrote, I dislike such stolid holdings as total bond market exchange-traded funds and funds designed to replicate the Bloomberg Barclays Aggregate Bond index—which is 42% Treasuries and includes no municipals, high-yield bonds, bank loans or credit card receivables. To me, that approach treats debt instruments primarily as “stuff that isn’t stocks” rather than as a vibrant, investable universe of its own.

I grant that Vanguard Total Bond Market ETF (symbol BND) has a practically invisible 0.05% expense ratio and that during periods of unease about lesser-grade corporate bonds, tax-exempts or foreign I.O.U.s, it can beat many of its actively managed and more creative rivals. In the fourth quarter of 2018, BND returned 1.65%, while Dodge & Cox Income (DODIX, yield 3.36%) made just 0.27%. But over the years, Dodge & Cox’s broad reach and wise decision-making have given patient shareholders a huge advantage over the index trackers, even given its vast size. The firm has succeeded brilliantly with some of the largest mutual funds the world has ever seen.

Best bets for 2019. Right now, I’ll un­ambiguously endorse Dodge & Cox Income as a keeper for 2019. I’ll say the same about Thornburg Strategic Income (TSIIX, 5.45%), and, if you can buy them without a load through your broker or adviser, PGIM Unconstrained Bond (PUCAX, 3.50%) and Pimco Income (PONAX, 3.70%). The common thread is short duration (meaning a low sensitivity to interest rates), high yield and an adventurous but not reckless roster of bond issuers and credit ratings. Some of these types of funds suffered at the end of the year, apparently because liquidity in the loan and credit markets tightened up—that’s an insider’s way of saying funds that had to sell pools of loans, low-rated short-term “junk” bonds and the like did so at terrible prices. But the market has since loosened up, and this cycle has abated.

If you’re looking for a satellite fund to add to your core holdings, consider RiverNorth DoubleLine Strategic Income (RNDLX, 5.9%). Last year, the fund lost 1.53%. But in the first two weeks of 2019, this combination of Jeffrey Gundlach’s mortgage strategies at DoubleLine and RiverNorth’s knack for finding under­valued, high-yielding assets, such as deeply discounted closed-end funds, returned a fat 2.25%.

The challenge for bond fund managers in the year ahead is no longer what the Fed might do but the consequences of its rate-raising campaign so far: the now-competitive yields on bank deposits and Treasury bills. Jeffery Elswick, director of fixed income for the Frost funds, says clients ask why they should not put all their money in cash—as in greenbacks—or in T-bills. His response is that there are lots of bargains in oversold assets that funds can now scoop up. “The most value is in [short- and intermediate-term] investment-grade corporates and high-yield bonds,” he says, along with floating-rate debt. Frost Total Return (FATRX, 4.79%) has a long history of besting the Bloomberg Barclays Agg index and Vanguard’s total bond ETF, with the exception of the last three months of 2018.

I have followed the management teams for most of these funds for decades, and I am enormously confident in all of them. That so many trusted fixed-income funds didn’t lose more money in 2018 is a positive. If the Fed does as I expect and either pauses raising rates or hikes them less frequently than it has been, many other active fixed-income funds will turn things around nicely from the trials of 2018.

Most Popular

How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!
estate planning

How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!

Upstream basis planning is a trust strategy that can save wealthy people on their capital gains taxes and income taxes associated with highly apprecia…
July 3, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 15 Best Growth Stocks for the Rest of 2022
growth stocks

The 15 Best Growth Stocks for the Rest of 2022

A sharp selloff in growth stocks this year creates opportunity for keen investors. Here are 15 top-rated picks to consider in the second half of 2022.
June 28, 2022

Recommended

Is the Stock Market Closed for the Fourth of July in 2022?
Markets

Is the Stock Market Closed for the Fourth of July in 2022?

Independence Day falls on a Monday in 2022, so the bond and stock markets will enjoy a long holiday weekend. Here's a look at the markets' holiday hou…
July 1, 2022
Top Bear Market Tips from 10 Financial Advisers
investing

Top Bear Market Tips from 10 Financial Advisers

When a bull market turns into a bear market, it can be hard to know what to do. Take comfort in the guidance of 10 financial professionals.
June 30, 2022
Move Over ETFs: Direct Indexing Is an Investment Strategy Worth Paying Attention to
investing

Move Over ETFs: Direct Indexing Is an Investment Strategy Worth Paying Attention to

More flexibility, more control, the potential for higher returns and tax-reducing strategies: With pros like that, could direct indexing be right for …
June 25, 2022
Janus Henderson Global Equity Income Fund Hangs Tough
Kip 25

Janus Henderson Global Equity Income Fund Hangs Tough

A focus on dividend payers and defensive stocks has kept the Janus Henderson Global Equity Income Fund afloat in a rough market.
June 23, 2022