Top Supporting Players for Your Bond Funds

Given continued inflationary pressures, historically low yields, and the threat of rising interest rates, the bond market is not necessarily the safe haven that it was once presumed to be.

But that doesn't mean that investors should give up on bonds altogether. The core bond funds that are mainstays in many investors' portfolios provide valuable ballast for equity-heavy portfolios and will likely hold up better than stocks if the economy continues to show signs of weakness. (As stocks have struggled during the past six weeks, they've done just that.)

That said, many investors might be thinking about augmenting their core bond holdings these days, either to hedge against the potential for rising interest rates or add a dash of spice to help kick up returns.

To home in on some topnotch satellite bond funds to fill these roles, we turned to the  Premium Fund Screener. We quickly narrowed our search to the cream-of-the-crop funds by screening for  Fund Analyst Picks--investments that our in-house fund analyst team deems the best of the bunch. Additionally, we filtered for bond funds that our analyst team has designated as "supporting players," meaning that they're best used to supplement core offerings in the intermediate-term bond category. Below, we've highlighted three of the screen's results. Premium members can  click here to replicate the screen. The first pick is a top choice for investors who are concerned about the prospect of interest-rate shocks. The latter two funds, meanwhile, are aggressively positioned credit-sensitive offerings.

 T-Rowe Price Short Term Bond (PRWBX)
Manager Ted Wiese keeps this portfolio heavy in corporate bonds, but he also invests in other sectors such as government, mortgage, and asset-backed securities. He usually keeps the portfolio's credit quality at AA, but he'll also hold BBB holdings; unhedged international bonds also play a role in the portfolio. He won't make major interest-rate bets, however, keeping the fund's duration around two years, and he also maintains an extremely diversified portfolio. That strategy has helped the fund provide good downside protection. In 2008, for example, it posted a small gain even as some of its peers posted losses because of their exposure to credit-sensitive bonds. For investors who are looking for a smooth ride, this offering presents a compelling option.

 Loomis Sayles Bond Retail (LSBRX)
This fund is clearly best used in the "aggressive kicker" slot in a fixed-income portfolio, as management favors out-of-favor sectors and keeps about one third of assets each in domestic junk bonds, emerging-markets credits, and nondollar bonds. That proved a combustible mix in 2008, when the fund's substantial exposure to credit-sensitive bonds led to a 22% loss. Given the prospect for continued volatility, this offering should only take up the periphery of a long-term investor's portfolio. Yet there's a lot to like about this fund's flexibility and the depth of its experience. Winners of the Morningstar Fixed-Income Manager of the Year Award in 2009, veteran managers Dan Fuss and Kathleen Gaffney are a power team; they're backed by experienced comanagers Matt Eagan and Elaine Stokes as well as a squad of 20 experienced senior corporate research analysts. (Fuss is also the fund's largest shareholder.) The fund's current portfolio is prepared for what the managers think could be an extended period of rising interest rates, so investors should be well-protected if management's predictions play out.

 Fidelity High Income (SPHIX)
Longtime manager Fred Hoff focuses on junk bonds for this high-yield offering, and B rated bonds soaked up more than half of the fund's portfolio earlier this year. But Hoff doesn't neglect safety. Armed with a disciplined bottom-up approach, he sticks to companies with solid prospects for recovery during the next two or three years. And he won't pick up a bargain without considering a safer alternative. For example, Morningstar associate director of fund analysis Miriam Sjoblom writes that Hoff passed up the opportunity to own the battered debt of insurance giant  American International Group (AIG) and instead purchased the bonds of its aircraft leasing subsidiary ILFC, which are supported by the value of its aircraft fleet. This turned out to be a good call, as ILFC was also one of its top performers last year. Investors looking for a high-yield kicker run by a seasoned hand can find a lot to like in this Analyst Pick offering.