Fund Times

Five Government-Bond Funds That Have Held Up

Katie Rushkewicz Reichart, CFA

Government-bond funds, one of the only safe havens in the market meltdown of 2008, have taken it on the chin this year as the recent market rally has brought back investors' appetite for risk. Long-term government-bond funds, a notoriously volatile bunch, are down more than 19% in the year to date through June 10, 2009. Intermediate-term government-bond funds have fared better, losing just 0.32%, while short-term funds have eked out a 0.63% gain. Those returns pale in comparison to the S&P 500, which is up more than 5% for the year.

Not all government-bond funds are struggling, though. In fact, some funds have seen a reversal of fortune, catapulting from the bottom of the group to the top. Leading the pack are intermediate-term funds  Putnam U.S. Government Income (PGSIX) and  Putnam American Government Income PAGVX. Both funds tanked in 2008 because of nongovernment exposure and an aggressive approach that included leverage, but they're up 12.75% and 9.04%, respectively, in the year to date through June 10, 2009.

Several short-term government-bond funds have held their own, including Wells Fargo Advantage Short Duration Government Bond (MNSGX) and  Sit U.S. Government Securities (SNGVX), which led the way with gains of 4.04% and 3.59%, respectively.

Predictably, most long-dated government funds have gotten trounced and are facing losses. PIMCO Real Return Asset (PRAIX) is the lone long-term fund in the black, up 2.81% so far in 2009.

Many of the funds that have looked the best so far in 2009 still have a lot of ground to make up, though, as they try to recover from 2008's losses. It's also worth noting that many of this year's leaders aren't your typical plain-vanilla government-bond funds. In many cases, they're following aggressive strategies that are significantly different from their peers. That may pay off now, but it's important to consider the added layer of risk.

Fidelity Fodder
Fidelity announced a deal on June 8 that gives retail and institutional brokerage clients access to alternative asset manager KKR's initial public offerings. KKR, which has $35 billion in private equity and $12 billion in credit assets under management, will act as underwriter for all securities, giving the firm a new distribution channel.

Fidelity also announced management changes at a few of its funds. Sonu Kalra will replace Jennifer Uhrig on the lackluster  Fidelity Blue Chip Growth (FBGRX) on July 1. Kalra, who has posted strong returns at  Fidelity OTC (FOCPX) since taking over in 2005, will likely be less benchmark-oriented than Uhrig, which could give the fund a much-needed boost.

Kalra will relinquish Fidelity OTC to Gavin Baker, who has run  Fidelity Select Telecommunications (FSTCX) and  Fidelity Select Wireless (FWRLX) since early 2007.

Vanguard Tweaks Money Market Lineup
With yields on short-term Treasuries plunging to near-historic lows and money market funds feeling the heat, Vanguard has decided to merge two money market funds and close a third one. Vanguard Treasury Money Market Fund will merge into Vanguard Admiral Treasury Money Market Fund on Aug. 11, 2009. The newly combined fund will charge the Admiral Treasury Money Market Fund's lower 0.15% fee. Meanwhile, Vanguard Federal Money Market Fund closed to new investors on June 2.

PIMCO's New Funds and a Familiar Face
PIMCO is planning to launch PIMCO Emerging Markets and Infrastructure Bond fund. The fund can invest in a variety of debt instruments around the world, from mortgage-backed to structured notes to corporate bonds, and will keep 80% of its assets in investment-grade securities. Brigitte Posch, a member of the emerging-markets team at PIMCO since 2008, will serve as manager.

A public filing also indicated that two new inflation-indexed bond funds are in the works. PIMCO Real Income 2019 and Real Income 2029 will invest mostly in Treasury Inflation-Protected Securities, an area that could see greater demand as inflation concerns mount.

In other news, Sudi Mariappa has rejoined PIMCO in a new role that will include work on special trading projects.

Evergreen Funds Rocked by Scandal
Evergreen Investments, the $164 billion mutual fund unit of Wachovia (which was acquired by  Wells Fargo (WFC) in December 2008), has settled with the SEC over charges that it improperly valued mortgage-backed securities in the now defunct Evergreen Ultra Short Opportunities fund. Read the full story here.

Peter Bernstein Dies
Peter Bernstein, a noted economic historian and proponent of the efficient market hypothesis, died last week at age 90. Read more about his work here.

More Active ETFs Join the Fray
Grail Advisors has announced plans to launch four new actively managed ETFs, including a technology fund, financials fund, and two large-cap growth offerings. The ETFs will be subadvised by RiverPark Advisors, which was founded in 2006 and includes former Baron Funds managers Morty Schaja, Mitchell Rubin, and Conrad van Tienhoven.

Western Asset Bolsters Team
There are a few new faces at Western Asset Management. Steven Kreider has come over from Morgan Stanley and will oversee insurance and structured products. Ryan Brist from Logan Circle Partners, LP, and Ivor Schucking from PIMCO will work on the investment-grade credit team. Dipankar Shewaram from BlueBay Asset Management will head up the firm's non-U.S. credit effort in London, and Andrew Belshaw, formerly of BlackRock, will also join the firm's London office.

Mid-value fund Allianz OCC Renaissance (PQNAX) has changed hands. The $758 million fund had been subadvised by Oppenheimer Capital since 2005, most recently run by Brad Holmes and Nicholas Frelinghuysen. After a stretch of middling performance, Allianz announced that it will now be subadvised by NFJ Investment Group and renamed Allianz NFJ Renaissance, effective June 8. The renowned team at NFJ, including Ben Fischer, Paul Magnuson, and Morley Campbell, also runs Analyst Pick  Allianz NFJ Small Cap Value PNVDX.

The $595 million  TFS Market Neutral TFSMX will close to new investors on June 30, 2009.

Katie Rushkewicz Reichart, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.