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By Christine Benz and Miriam Sjoblom, CFA | 12-27-2012 12:00 PM

Risk-Taking Pays Off for Bond Investors in 2012

After a good year in the bond markets, the opportunities are not what they have been in the past.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

As the year winds down, it's clear that risk-taking has paid off for bond fund investors so far in 2012. Joining me to share some perspective on bond fund performance so far this year is Miriam Sjoblom. She is associate director of fund analysis for Morningstar.

Miriam, thank you so much for being here.

Miriam Sjoblom: Good to be with you, Christine.

Benz: Miriam, you noted in a recent commentary that everything risky appealed to bond investors in 2012. Let's talk about some of those key categories that have actually performed very well and gathered a lot of investor dollars?

Sjoblom: That's right. Some of the best-performing sectors this year have been high-yield corporate bonds and emerging-markets debt. Non-agency mortgages--we don't have a lot of funds that invests heavily in those--but that has also been a very strong-performing sector this year.

So you are talking about returns in a range from 15% to 20% for some of these sectors, and at the same time you see that sort of grab for yield; investors have been attracted to the extra yield offered by high-yield corporates and emerging markets, and the great returns too. Those two categories appear to be on track to receive record net inflows this year in excess of $20 billion.

Benz: But Miriam, the core funds also did really well. So it wasn't just the higher-risk categories; you also did well if you were in a core type intermediate-term bond fund?

Sjoblom: That's right. And a lot of core funds do invest a little bit in these types of sectors--high-yield and EM--and currency was also big, if you had a little bit of currency exposure.

Benz: If you didn't just stick with the dollar, but invested in foreign currency denominated bonds.

Sjoblom: Yes, especially some emerging-market currencies, Eastern Europe and Latin America, then you did pretty well.

So, this was a year where, if you were just in the plain-vanilla index, you did well. You got about a 4% return to be in a Barclays U.S. Aggregate Bond index-tracking fund. But we had some active managers who were more adventurous, returned in excess of 10%, and lot of big widely followed managers like Bill Gross, who had a difficult year last year at PIMCO Total Return, and this year, he is doing really well, partly from having exposure to some of these areas.

MetWest Total Return Bond is also having a great year. They made good bets in financial corporates, which had a big rally this year. And non-agency mortgages, they've owned a teens-size stake in that sector, so they did very well owning those types of securities, too.

Benz: You also mentioned that another widely held fund, Templeton Global Bond, had a reversal of fortune--not such a great year in 2011, a very strong year in 2012. What was the underpinning of its success?

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