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All Contents © 2019The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| July 2, 2018
A rising-rate environment poses challenges for income investors. After all, when interest rates rise, bond prices fall. At times like this, a seasoned bond-fund manager can be an income investor’s best friend.
At Kiplinger, we prefer mutual funds with solid long-term records – and managers with tenures to match. Also, we prefer funds with below-average volatility for their category, and we keep a close eye on a fund’s size because a gargantuan asset base makes managing a fund difficult.
And, of course, low operating costs are crucial for our funds – all actively managed – to overcome the biggest advantage of index funds: microscopic expense ratios.
When it comes to investing for income in choppy markets, these six bond funds – culled from the list of our favorite low-fee mutual funds – stand out.
Funds are listed in alphabetical order by ticker symbol. Returns, yields and expense ratios are as of June 18, 2018. Data provided by Morningstar.
1-year return: 0.1%
3-year return: 2%
5-year return: 2.4%
10-year return: N/A
Expense ratio: 0.73%
The focus: Mortgage-backed securities with intermediate-term maturities.
The process: Bond gurus Jeffrey Gundlach and Philip Barach pair complementary types of mortgage-backed securities. Government-guaranteed bonds, which are high in credit quality but sensitive to swings in interest rates, are balanced with non-agency mortgage securities, which bear a higher risk of default but less interest-rate risk. (Bond prices typically fall when rates rise, and vice versa.)
The track record: Since its inception in April 2010, Total Return Bond has returned 5.8% annualized, trouncing Bloomberg Barclays U.S. Aggregate Bond index (with a tad less volatility, too). The fund yields 3.4%.
1-year return: 0.9%
3-year return: 2.2%
10-year return: 3.5%
Expense ratio: 0.36%
The focus: Bonds that pay tax-free interest income.
The process: Reasonably priced municipal bonds with stable finances draw Mark Sommer and his two co-managers. The trio monitor safety with a proprietary tool that analyzes risk in the portfolio.
The track record: FLTMX isn’t a chart topper, but it offers a smooth ride that pays off long-term. Over the past decade, its risk-adjusted return bests all but a few in its category. Its 2.2% yield translates to a 3.7% yield for investors in the highest tax bracket.
1-year return: -3.7%
3-year return: 5.1%
5-year return: 4.2%
10-year return: 6.9%
Expense ratio: 0.82%
The focus: Emerging-markets government bonds issued in U.S. dollars.
The process: John Carlson blends big-picture economics with security-specific analysis to find bargain bonds in developing countries. At last report, Mexico, Turkey and Argentina are big country bets. The fund yields 5%.
The track record: Fidelity New Markets Income delivered an annualized return of 6.9% over the past decade, which beat 88% of the funds in its category.
1-year return: -1.1%
3-year return: 1.3%
5-year return: 1.9%
10-year return: 5.3%
Expense ratio: 0.67%
The focus: Discount-priced, high-quality intermediate-term bonds.
The process: The four bond pickers at Metropolitan West Total Return have been playing defense for the past year by loading up on investment-grade corporate debt, government mortgage bonds and Treasuries. “The longer and more extreme the party gets,” says comanager Tad Rivelle, referring to what he views as an economic cycle at its peak, “the more cautious you should be.”
The track record: The fund’s safety-first position has dulled results. “We were early,” Rivelle says of the fund’s defensive stance. The fund yields 2.6%.
1-year return: -0.1%
3-year return: 1.4%
5-year return: 1.5%
10-year return: 2.7%
Expense ratio: 0.20%
The focus: High-quality bonds maturing in one to five years.
The process: Gregory Nassour delivers a 3.0% yield by playing around with the mix of short-term corporate debt, government bonds, and mortgage-and asset-backed securities.
The track record: Over the past five years, Short-Term Investment Grade returned 1.5% annualized -- better than 78% of its peers.
1-year return: 1.6%
3-year return: 4.6%
5-year return: 4.7%
10-year return: 6.7%
Expense ratio: 0.23%
The focus: Income generated from corporate debt rated double-B or lower.
The process: Manager Michael Hong tilts conservatively toward the better-rated end of high-yield “junk” bonds; he sticks with companies with strong balance sheets and stable free cash flow. The fund yields 5.4%.
The track record: Over the past five years, the fund’s 4.7% annualized return puts it ahead of its typical peer.