Find Seaworthy Core Bond Funds Here

While the volatility of fixed-income funds normally doesn't reach that of the typical equity fund over long periods of time, it's been a relatively wild ride in the bond markets through the October 2007-March 2009 equity bear market and the subsequent rally. During the bear market, particularly starting in the latter half of 2008, investors fled most debt securities with even a hint of risk--and the credit-rating agencies turned out to be too lenient at times in rating bonds. But when optimism returned in early 2009, risk quickly came back in vogue and high-yield and mid-grade corporate bonds soared. This turbulent period could be seen as a proving ground for bond managers' strategies. A fund that managed to navigate this environment with aplomb, and sported many of the other fundamental traits investors should look for, ought to make an excellent core fixed-income holding.

To look for solid core bond funds, we fired up the  Morningstar Premium Fund Screener on Morningstar.com. The screener was set to search for the distinct portfolios of intermediate-term bond funds that require a minimum initial investment of $10,000 or less and are covered by Morningstar's fund analysts. We also wanted managers with at least five years at the helm, expense ratios of 0.8% or less (this was a relatively stringent criterion, but it seems appropriate in a bond market with paltry yields), and funds that landed in the top half of the category both in 2008 and 2009 and had outperformed at least two thirds of their category peers over the trailing five years through Jan. 15, 2010.

The screen returned four funds as of Jan. 18, 2010. (Results may be different when the screen is run on other dates.) Click here to run the screen yourself.

 Dodge & Cox Income (DODIX)
 Harbor Bond (HABDX)
 Managers PIMCO Bond (MBDFX)
 Metropolitan West Total Return Bond (MWTRX)

The longer-term criteria such as manager tenure and performance were purposely kept to five years rather than 10 in hopes of capturing some newer, promising bond managers who had ably navigated the volatile bond markets. But all four of the funds that passed our screens are run by long-proven skippers who are relatively well-known to investors. The average manager tenure at these four funds is more than 16 years.

Dodge & Cox Income
This fund's venerable management team has long held more corporate bonds than most rivals in a belief that the strength of its analysts should give it a leg up with these types of securities. The fund struggled early on when the subprime mortgage crisis hit in 2007. (It didn't hold subprime bonds, but it held a few corporate issuers that were hit by this crisis.) The fund has since found its footing again. Although it sharply lagged its benchmark (the Barclays Capital Aggregate Bond Index) in 2008, it outpaced more than half its peers due to a defensive shift into agency mortgage bonds. And late in that year and in early 2009, the team sold a chunk of its mortgage holdings in favor of beaten-down corporates, which set it up for outperformance when those bonds rallied beginning in March. The fund's long-term record is excellent and it boasts rock-bottom costs.

Harbor Bond, Managers PIMCO Bond
Both of these funds have long been subadvised by the legendary Bill Gross of  PIMCO Total Return (PTTAX). His own fund (which is run using an essentially identical strategy) didn't make the cut because the distinct portfolio is a share class that's too expensive for our screens, but these two funds are excellent lower-cost options. Gross and his huge team of analysts and traders use a broad range of tools to invest in the bond market based on both his macroeconomic outlook and short-term cyclical factors. Gross was wary of corporate bonds' valuations in recent years, part of the reason his funds held up better than many of its rivals in 2008. The team scooped up some bargains in that area, which helped in 2009's rally, but didn't go whole hog like some rivals. As a result, these funds didn't blow away their peers in 2009, but they look superb over longer periods and there's plenty of reason to believe they'll succeed in the future.

Metropolitan West Total Return Bond
This fund's four-person management team, which includes three veterans of PIMCO, will take interest-rate, yield-curve, and sector bets and will focus on issue selection as well. Unlike Bill Gross, they've favored corporate bonds in recent years as well as asset-backed debt. But they built a hefty stake in Treasuries in late 2007 as their concern over the housing market increased. That stance stood the fund in good stead in 2008, and a move into beaten-down mortgages led to a solid showing in 2009. This fund can sometimes make contrarian plays that backfire (witness its very poor 2002 showing), but it's been outstanding over the long haul.

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