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Top 'Aggressive Kicker' Bond Funds

These noncore funds can augment sturdy, higher-quality core holdings.

If you're a conservative investor, building a bond portfolio could be as simple as identifying a sturdy core fund and possibly supplementing it with a short-term vehicle to help address short-term cash needs. But if you have a long time horizon for at least part of your fixed-income holdings, you can consider adding a component with a higher-risk profile but also potentially higher returns.

I tackled how to identify worthy core bond funds yesterday. Today, let's take a look at how you might go about finding reasonable "aggressive kicker" bond funds that you could use around the margins of your portfolio to amp up its return potential.

Using our Premium Fund Screener, I started by focusing on categories that I consider noncore: high-yield, bank-loan, multisector, world bond, emerging markets bond, and our new nontraditional bond category.

All of these categories have higher volatility--in some cases much higher--than intermediate-term bond funds, as measured by standard deviation. But they also have the potential to diversify a portfolio anchored in government, high-quality corporate, and mortgage-backed bonds, and they may also contribute to a higher long-term return.

I excluded TIPS funds from my screen because I consider them core, even though TIPS don't appear in the Barclays Aggregate Bond Index. I also excluded long-term bond funds from my screen. Given the havoc that rising rates could wreak on long-duration portfolios, I think their risk/reward trade-off is unattractive, even for aggressive investors.

Using Morningstar’s new qualitative analyst ratings, I screened on those funds that our analysts have rated as gold or silver, meaning that they score well on most or all of the following metrics: management, stewardship, fees, performance, and strategy. I also layered on a screen for accessibility, kicking out any fund with a minimum initial investment higher than $10,000.

Premium Members can click  here to run the screen themselves; I've highlighted some notable funds below.

Fidelity Strategic Income
This fund aims to balance out the risky components of its portfolio (high yield and emerging-markets bonds) with U.S. government bonds and developed-markets debt securities. Because of that balance, it veers more into "core holding" material than do most funds in its peer group. Analyst Sarah Bush says that the fund's competitive advantage comes from its talented pool of portfolio managers running each of those sleeves. For example, Mark Notkin, who runs the portfolio's largest component--high-yield--has worked on the fund for more than a decade and has also generated very strong, though volatile, results at sibling Fidelity Capital & Income (FAGIX).

Templeton Global Bond (TPINX)
This fund has struggled this year, owing to its sizable exposure to emerging Asia as well as its bets on peripheral European currencies relative to the euro; a below-average duration hasn't helped much, either. As a result, it's lagging its world-bond peers by nearly 5 percentage points, a stunning level of underperformance in the bond-fund world. Yet investors in truly active funds like this one have to be prepared for periodic bouts of underperformance; after all, the same type of idiosyncratic positioning that has been hurting the fund lately has helped it in the past. 

Vanguard High-Yield Corporate (VWEHX)
Because this fund typically maintains a higher-quality portfolio than most of its peers, its losses are usually milder than rivals' in tough high-yield markets, but it loses ground in big junk-bond rallies. Not surprisingly, then, it held up well in 2008's high-yield rout as well as the turbulence this past summer, but lagged in 2009 and 2010. Like all Vanguard funds, this one's ultra-low expense ratio provides a helping hand, in this case ensuring that manager Michael Hong doesn't have to venture too far out on the risk spectrum to deliver competitive long-term returns.

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