It has been a tricky year so far in 2008 for bond-fund investors. The credit crunch has continued to play out, policy makers and risk takers have fuelled rallies and Cassandras have stalled them. Last week, my colleague Scott Berry examined some managers who have been navigating this environment well. I thought I'd turn his article on its head and look at some of those who have been struggling through the year's first half. In some cases, these funds remain very strong options that have just hit a rough patch, while in other instances the crunch has exposed funds' inherent flaws.
To assemble a reasonably sized list of the downtrodden, I screened for fixed-income mutual funds that have been among their respective Morningstar categories' worst 10% from Jan. 1 to June 30. To keep the results relevant for more readers, I eliminated funds with asset bases below $500 million. The process yielded 44 funds, and I'll discuss a handful of the larger and more prominent ones in more detail below.
Fidelity Advisor High Income Advantage (FAHDX)
Year-to-Date Return: -2.80%
We've told folks over the years to be careful with this fund. Manager Tom Soviero doesn't try to position the fund as a core high-yield offering, but rather as one that will offer a fair amount of capital appreciation. He invests in lower-quality bonds, convertibles, and straight equities to a greater degree than most rivals. That recipe has met with volatile results over time, including during the first six months of 2008. Though the fund has a good record of bouncing back after taking hits in the past, and it likely will do so again, it could continue to face a headwind if high-yield issuer defaults pick up, as typically happens during a recession, but hasn't happened yet.
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Paul Herbert does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.