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By Christine Benz | 01-27-2011 01:27 PM

Jacobson's Bond Fund Picks for Retirees

Morningstar's director of fixed-income research offers up his picks for the core of your portfolio, go-anywhere flexibility, short-term savings, inflation protection, and aggressive kickers.

Christine Benz: Hi I'm Christine Benz for Morningstar. It's Retirement Portfolio Week and here to discuss some of his best ideas for the fixed-income portion of retiree portfolios is Eric Jacobson. He is director of fixed-income research for Morningstar.

Eric, thanks so much for being here

Eric Jacobson: Glad to be here. Thanks.

Benz: So I wanted to cycle through a few different roles that people might use fixed income for in their retiree portfolios. Let's start with that core portion that will take up a big portion of someone's bond portfolio. What are your best ideas? What are your favorite funds?

Jacobson: Well I think it's no surprise that we are big fans of Bill Gross of PIMCO, and I think that one way for people to take a fresh look at this is to decide if they are in the best place it.

For individuals doing their own thing at home, if you will, we like to recommend Harbor Bond, and the reason for that is that it has a much lower expense ratio. It's got a low minimum, and it's available to individuals.

PIMCO has, of course, PIMCO Total Return. Other share classes that are easily available through financial planners and brokers, and if you work with the professional like that, some of them are a better deal than others. You definitely want to take a look.

Benz: And also if it's in 401(k) plan, it may be a pretty good deal if you get that institutional share class?

Jacobson: If it's in your 401(k) plan you want to check on it, but chances are you are getting a great deal there, because a lot of them use the institutional share class, which is, relative to other funds, pretty cheap.

Then the other choice in terms of really what we think of as the core or core-plus space that we would suggest as the centerpiece, would probably be Metropolitan West Total Return, and it's another fund that we've followed for a long time. It is now actually part of the TCW shop, since they were absorbed in there, but they are another one of our favorite choices.

Benz: And Eric you also brought along a couple of the new go-anywhere funds--well, they are not necessarily new. But this seems to be a big vogue right now--funds where the manager has that wide-open tool kit. Can you share some favorites along those lines?

Jacobson: Absolutely. And the only caveat I would make is that the selling point for these with a lot of people, and I think regardless of how much it's talked about, people have to be honest with themselves. I think a lot of people are buying them because they hope and expect that these will bypass any rising rate problems that we might have.

And the good news is, they both have some flexibility to do that or lot of flexibility, in fact. The question, though, is: will they make the timing choices that are required to not only side-step and beat rising interest rates, when they eventually start coming, but will they do it in such a way that they are able to continue to make money in the good periods? That's always a problem with interest rates fluctuations is, even if you think you know long-term what they are going to do, they bop back and forth, and you can make money and lose money if you are wrong.

That said, these are some managers we really like, and we think are pretty good at it. We are still learning about them over the last couple of years, because it's a very unusual space, but one of them is Harbor Unconstrained. That's the Harbor version, the no-load version of PIMCO Unconstrained Bond. It's run by a guy named Chris Dialynas, long-term PIMCO veteran. We like it. PIMCO Unconstrained Bond for folks who are working with a planner.

Other folks might consider also--either way, planner or individual--JPMorgan Strategic Income Opportunities; that's another fund. That's got a lot of leeway, not as aggressive in some ways as the PIMCO fund, but both interesting choices to look at.

Benz: Now, I also want to talk about munis, because I know a lot of our watchers and users, do use munis. Fidelity is the tops of your list most of the time. Still the case?

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