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.
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.