investing

BBH Limited Duration: More Income, a Bit More Risk

The short-term bonds in this fund are stress-tested.

Money that you need at your fingertips in the very short term should be stashed in federally insured accounts, period. But if you’ve got some money that you don’t want to lock up long-term and that can stand a little volatility—perhaps you’ve sold some stocks and you’re waiting to redeploy the proceeds—then consider an ultrashort bond mutual fund.

Bonds in these funds, which typically yield more than cash accounts for a little more risk, usually come with maturities of a year or less. Bonds with short maturities have less time to default, making them less risky than longer-dated debt. And with yields on 10-year Treasuries languishing in the basement, there’s little incentive for income investors to venture out of the shallow end of the pool.

BBH Limited Duration (symbol BBBMX) currently yields 1.9%—a bit less than Standard & Poor’s 500-stock index and about the same as Bloomberg Barclays U.S. Aggregate Bond index, a benchmark for the broad bond market. To build the portfolio, managers Andrew Hofer and Neil Hohmann start by screening the broad bond universe, including corporate and municipal bonds as well as bundles of loans known as securitized debt, to hunt for undervalued issues—those projected to comfortably outperform similarly dated Treasuries, but whose risks the bond market overestimates. In early February, 7% or 8% of corporate bonds passed the screen. By mid March, amid market turmoil, more than 60% looked like potential deals, says Hofer.

Ultrashort bond funds chart

Kiplinger's Personal Finance

From there, the fund’s management team goes bond by bond, favoring offerings from experienced issuers and those backed by understandable, transparent cash flows. Managers “stress test” each bond in the portfolio to assess how it would hold up under worst-case scenarios. Bonds backed by consumer loans assume 20% unemployment, for instance. Such rigor allows the fund to venture into slightly riskier territory than peer funds.

Over the past decade, Limited Duration has been about 25% more volatile than the average ultrashort bond fund, but 75% less volatile than the broad bond market. The fund posted a positive return in each of the past 10 calendar years. Over the past 15 years, its 2.7% annualized return led all ultrashort bond funds.

Most Popular

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?
retirement

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?

In our experience, many have saved enough money to retire comfortably. Yet too many worry about their money running out and want more. Maybe it’s tim…
May 6, 2021
Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021
9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by May 17 than just filing your federal in…
May 4, 2021

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
American Century Small Cap Value (ASVIX) Joins Kip 25
Kip 25

American Century Small Cap Value (ASVIX) Joins Kip 25

American Century's small-cap-focused ASVIX consistently delivers high returns with average risk, and bears little resemblance to its benchmark.
April 30, 2021
The Disturbing Conflicts of Interest in Target Date Funds
mutual funds

The Disturbing Conflicts of Interest in Target Date Funds

Are you one of the 40 million folks who has a target date fund in your 401(k)? It could be costing you 21% in returns over the course of your career, …
April 30, 2021
The Kip 25: The Best Low-Fee Mutual Funds
mutual funds

The Kip 25: The Best Low-Fee Mutual Funds

The key to building wealth long-term is buying high-quality, low-cost mutual funds run by seasoned stock pickers. Here are our favorites: The Kiplinge…
April 29, 2021