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Finding Quality Funds to Fill Your Buckets

Our screener tool can help retirees and those approaching retirement identify funds that fit different time horizons.

Mention the idea of making a bucket list to many retirees, and it might conjure up images of an around-the-world cruise, hiking Mt. Kilimanjaro, or any number of life goals. But when it comes to investing strategies for retirees, a bucket list might also refer to a collection of funds used to structure a portfolio for the short, medium, and long term. 

For those who might be unfamiliar with the bucketing approach, Christine Benz, Morningstar's director of personal finance, provides a good overview in this article. The basic idea is to manage retirement savings based on when the money will be needed. Money to be used for living expenses in the coming year or two goes into the first bucket and is invested in low-risk securities such as Treasuries or short-term bonds. If desired, a mid-term bucket may be used for funds that won't be needed for another three to 10 years and which the retiree may want to expose to slightly more risk in exchange for a chance at slightly higher returns. Finally, a third bucket holds money that won't be needed for at least a decade and is made up of long-term investments--including equities--that have time to ride out any rough patches in the market.

Morningstar's  Premium Fund Screener can be a useful tool in identifying quality funds for each of these buckets. Below is a sampling of funds that fit the profile of each of the three buckets described above. We'll stick with funds that have Morningstar Analyst Ratings of Bronze or better to ensure they've been vetted for variables such as management, process, performance, and price. We'll also limit our exercise to no-load funds available to noninstitutional investors. Investors who don't mind paying a load can remove the "no-load" screen to see additional options. The distinct portfolio screen also will be used to eliminate multiple share classes of the same funds. It should also be noted that exchange-traded funds may be used to fill buckets, too, as Benz writes about here.

Short-term Bucket
For money needed during the next year or two safety is key. When you need money to pay the bills, exposure to equities or longer-duration bonds risks losing purchasing power in the event of a market swoon or rise in interest rates during that time span. For that reason, cash is a must for bucket 1. Retirees might consider augmenting that baseline cash stake with a high-quality short-term bond. Click  here for a list of short-term bond funds recommended by Morningstar's fund analysts. Here are two funds on the list.

 T. Rowe Price Short-Term Bond (PRWBX)
This fund excels at playing it safe. Manager Ted Wiese invests the bulk of the fund's assets in investment-grade corporate bonds and generally holds at least a fifth of assets in government mortgages (the typical short-term peer holds just 7%). The focus on corporate bonds means the fund sometimes carries more credit risk than the competition; currently, 27% of its assets are rated BBB, compared with just 16% for a typical peer. But Wiese avoids the highest-yielding sectors such as below-investment-grade corporates and steers clear of esoteric mortgage derivatives. Wiese has kept the fund's duration (a measure of interest-rate sensitivity) slightly shorter than its typical peer's for the last two years.

 Vanguard Short-Term Bond Index (VBISX)
For investors who prefer passive management, this fund tracks the Barclays Capital U.S. 1-5 Year Government/Credit Float Adjusted Index, which has three fourths of its assets in AAA rated bonds (as of Sept. 30, 2012), nearly all of which is U.S. government debt. The median short-term bond fund, meanwhile, has roughly half of its assets in bonds rated AAA and only 11% of assets in government bonds. The fund's high average credit quality, combined with its 2.7-year average duration, means it will tend to be more interest-rate-sensitive than many of its peers.

Medium-term Bucket
Because this money won't be needed for at least three years or more, you can afford to move up the risk spectrum, but not too much. It can take years for equities to recover from a steep market drop, so tread carefully. Think about using core intermediate-term bond funds or even hybrid stock-bond funds if you want some equity exposure (high-quality dividend-paying stock funds are another possibility). Click  here for a screen of quality bond and allocation funds that meet these criteria. Here are two examples.

 Fidelity Investment Grade Bond (FBNDX)
Like most Fidelity taxable-bond funds, this fund has a well-defined niche: It is the firm's investment-grade focused core bond portfolio. Manager Jeffrey Moore actively adjusts the portfolio's sector weights and will diverge from his benchmark, the Barclays U.S. Aggregate Bond Index, to build modest positions in securities such as high-yield and Treasury Inflation-Protected Securities. Recently, Moore's been active in adjusting the fund's mortgage exposures, adding when prepayment fears flare and take their toll on prices and selling when these fears subside. The fund's steady course in recent years has gone a long way toward putting a rough 2007 and 2008 behind it while low expenses and a deep, experienced team strengthen its appeal.

 Berwyn Income (BERIX)
This conservative-allocation fund's four-person management team is a somewhat cautious bunch. They cap the fund's equity weighting at 30% and focus on companies with healthy balance sheets, solid cash flow generation, and cheap price multiples. Within the fixed-income portfolio they tend to play to their strengths by emphasizing corporate debt, but they avoid the sketchiest fare at the bottom of the credit-rating scale (though they will invest in high-yield debt). They will limit interest-rate risk when they deem necessary; the fund recently held no Treasury bonds because the managers can't see yields getting much lower.

Long-term Bucket
For money that won't be needed for at least a decade, exposure to equities is appropriate and potentially even necessary to keep pace with inflation. Sticking with quality core equity funds (possibly mixing in noncore bond funds such as high-yield bond funds) can provide good long-term performance that suits your time horizon. Click  here for a screen of equity funds to think about for this bucket. Examples are below.

 Oakmark Select (OAKLX)
Despite the recent departure of a comanager, this large-blend fund remains in good hands with veteran lead manager Bill Nygren at the helm. Management looks for companies trading at significant discounts to what a rational businessperson would pay for them. Although Nygren is a value manager, he has historically been willing to invest in nontraditional value areas, including biotechnology. The portfolio is very concentrated, typically holding only 15-20 stocks. Top positions usually approach 10% of net assets but at times have reached 15% or more.

 Artisan International (ARTIX)
Manager Mark Yockey is a growth investor at heart. But he's always spread the fund's assets among faster-growing, somewhat pricey companies; higher-quality stable growers; and value plays, though the weightings of those three groups have shifted over time. The stable growers have lately played a bigger role, which helps explain why the fund moved from Morningstar's foreign large-growth category to foreign large-blend in 2010. The fund has always had somewhat of an independent streak--regional and sector weightings often stray significantly from the norm. Emerging-markets exposure has swung from quite light to 20% of assets at various times.

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