Top 'Aggressive Kicker' Bond Funds

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 core bond funds in this article. 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 nontraditional bond. 

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 Treasury Inflation-Protected Securities 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 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 screens for accessibility, kicking out any fund with a minimum initial investment higher than $10,000 and funds that are closed to new investments.

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

Fidelity Strategic Income 
This Silver-rated 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. Morningstar Analyst Sarah Bush says that the fund's competitive advantage comes from its talented pool of portfolio managers. While former manager Chris Sharpe left the fund in June 2012 to focus on running the firm's target-date lineup, Joanna Bewick and Ford O'Neil, both Fidelity veterans, provide oversight. The managers of the subportfolios are also fairly experienced: 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)
After a lackluster 2011, this broker-sold world-bond fund has come on strong so far this year, gaining 14% and landing in its category's top 5%. Those types of ups and downs are to be expected from a truly active fund like this one. Manager Michael Hasenstab, in contrast with many of his peers, pays little heed to issuance-weighted global benchmarks, typically downplaying the U.S., Japan, and the eurozone. Instead, he focuses on undervalued bonds of countries with healthy or improving economic fundamentals, a preference that has led him to sizable positions in countries such as Korea and Ireland.

A version of this article appeared Nov. 17, 2011.

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