These Core Bond Funds Earn Top Marks
We use our screening tool to go for the Gold and Silver.
Yield-starved investors have been gravitating to emerging-markets and high-yield bond funds of late, no doubt attracted by their better yields and stronger long-term returns relative to high-quality offerings. Such high-flying offerings can be a reasonable way to add some get-up-and-go to a fixed-income portfolio. But if counterbalancing equity exposure and reducing equity risk is a goal, there's no substitute for core high-quality fixed-income exposure. Such offerings will no doubt struggle in a rising-yield environment, but they're the best counterweight to equities.
To help identify worthy bond funds that fall under the core-holding heading, we started with intermediate-term taxable-bond funds, which deliver higher yields than short-term offerings and have much less volatility than what accompanies long-term bonds. (Whether your core bond funds should be taxable, municipal, or both depends on your tax bracket.)
We then layered on a screen for funds with Morningstar Analyst Ratings of Gold or Silver, 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. We also screened for funds our analysts consider to be well-suited as core holdings (as opposed to those better-suited as supporting players). Finally, we added a screen for availability to investors with less than $10,000 to invest.
The resulting list includes several topnotch core taxable-bond offerings. Premium members can see the complete list by clicking here; what follows are capsule summaries of some of the most notable offerings. And tune in tomorrow when we look at top-rated municipal-bond funds that make great core holdings.
Dodge & Cox Income (DODIX)
The managers of this taxable fund have typically emphasized agency mortgages and corporate bonds at the expense of government issues, which has often led to a higher yield than that of the Barclays Capital Aggregate Bond Index. Morningstar Analyst Miriam Sjoblom notes that that yield advantage has shrunk of late, making the fund--like most its peers--vulnerable in a rising-yield environment. Nonetheless, the fund still has lasting competitive advantages relative to its competitors, including a seasoned team of managers and low costs for an actively managed fund.
Harbor Bond (HABDX)
After a disappointing campaign in 2011, this fund rebounded in 2012, notching a 9% return and landing in its intermediate-term bond category's top 20% for the year. Chalk up that strong showing to a longer-than-average duration earlier in the year as well as allocations to high-yield and foreign bonds, which aren't present in the benchmark Barclays Aggregate Index. Bill Gross and the PIMCO team that run the fund have long been willing to maintain non-index-like positions, and their successful execution of those bets is a key factor in the fund's positive People and Process ratings. Likewise the fund earns top marks on the other three components of the Morningstar Analyst Rating: Price, Parent, and Performance.
Metropolitan West Total Return Bond (MWTRX)
The fund's experienced management team uses a value-oriented approach, buying bonds when they are cheap and selling once prices rise. High-yield corporates and nonagency residential mortgage-backed securities are favored, which can mean more credit risk than one finds among the fund's peers. The fund's 9.4% return during the 12-month period ended April 11 puts it in the top 10th percentile of its category, and the fund has consistently performed at that level during the trailing three-, five-, 10-, and 15-year periods, as well. The fund charges 0.63% in annual fees, below-average for the no-load intermediate-term bond group.
A version of this article appeared Dec. 12, 2012.
Morningstar.com does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.