These Core Bond Funds Earn Top Marks
We use our screening tool to go for the gold and silver.
We use our screening tool to go for the gold and silver.
It's Better Bond Investing Week on Morningstar.com, and it's also the week we're launching our new forward-looking Analyst Ratings for mutual funds. We've placed ratings on 350 funds so far (here's the complete list as of Nov. 15). Premium Members can also see the details on the ratings in individual funds' Analyst Reports.
The ratings are now a component of Morningstar's Premium Fund Screener, too. Although not all funds have ratings at this time--our goal is to have 1,500 funds rated by this time next year--the ratings provide our screening tool with more of a robust qualitative element than was available. In the past, Morningstar.com Premium Members could screen on Analyst Picks and Pans, but our new rating system supplants those designations and also offers more definition around funds that fall between those two extremes.
To demonstrate how our screening tool can harness the ratings to unearth topnotch core bond funds, we started with two core fixed-income categories--intermediate-term taxable bond funds and intermediate-term munis. Intermediate-term offerings are ideal core fixed-income holdings, delivering higher yields than short-term offerings with much less volatility than accompanies long-term bonds. (Whether your core bond funds should be muni, taxable, or both depends on your tax bracket, as discussed in this article.)
We then layered on a screen for funds that have been rated silver or gold in our new rating system, meaning that their aggregate score on the five components--parent (fund family), people (fund-management personnel), price, process, and performance--was well above average and that our analysts think they're likely to outperform in the future. Finally, we added a screen for availability to investors with less than $10,000 to invest.
The resulting list includes a mix of topnotch core bond offerings, some muni and some taxable. Premium Members can see the complete list by clicking here; what follows are capsule summaries of some of the most notable offerings.
Dodge & Cox Income (DODIX)
This taxable intermediate-term fund isn't having its best campaign thus far in 2011: Like many of its actively managed rivals, it has maintained a shorter duration than the Barclays Aggegate Bond Index, and its managers have also gone light on Treasury bonds versus the benchmark. Its short-duration, credit-sensitive profile hurt during the eurozone crisis, when long Treasuries rallied at the expense of almost everything else. Yet even though this bargain-hunting team's positioning hasn't paid off recently, we think it's a good bet that it will: The fund rates a positive score on each of the five prongs of our rating system--people, process, parent, price, and performance--easily earning gold-rated status.
Harbor Bond (HABDX)
This fund has suffered for some of the same reasons that Dodge & Cox has in 2011: too few Treasury and agency bonds and too short on the duration front. As a result, it's well behind the Barclays Aggregate Index for the year to date, and also lands in the basement of the intermediate-term bond group. Yet the fund's underperformance also underscores manager Bill Gross' willingness to stake out bold positions and not look indexlike, even as his various "Total Return" charges, including this fund, are the fund world's largest. Like Dodge & Cox, this fund earns top marks on the five pillars of our fund grade; we also like Harbor's all-subadvisor model and reasonable costs.
Fidelity Intermediate Municipal Income (FLTMX)
Among the Fidelity funds that have earned gold ratings thus far, a curious pattern emerges: They're nearly all bond funds. Morningstar's analysts have long considered the firm's muni operation the jewel in the crown at the firm, and they've gradually been warming up to the firm's taxable offerings as well. This particular fund has exhibited a profile that conservative muni investors will no doubt find attractive: While it periodically underperforms during big muni market rallies, it tends to hold up better during downturns like 2008. As a parent, Fidelity rates only a "neutral" in our new fund ratings, but the fund earns top marks on the other four components of the grade.
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