Top 'Aggressive Kicker' Bond Funds

If recent fund flows are any guide, many bond investors are in risk-on mode these days. Although short- and intermediate-term bond funds have seen sizable asset inflows, so have riskier fixed-income categories like bank-loan, emerging markets, high-yield, and multisector bond funds. 

All of these higher-risk categories have higher volatility--in some cases much higher--than that of intermediate-term bond funds, as measured by standard deviation. They also tend to have greater sensitivity to equity market movements than core high-quality bond funds, meaning they may not provide much ballast in a flight to quality. But such higher-risk noncore bond types also feature higher yields than their high-quality bond counterparts, and they also have the potential to diversify a portfolio anchored in government, high-quality corporate, and mortgage-backed bonds.

To help identify Morningstar's favorite options in higher-risk bond categories, I turned to 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.

I excluded Treasury Inflation-Protected Securities funds from my screen because I consider them core, even though TIPS don't appear in the Barclays Capital 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 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 multisector bond 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 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).

 Metropolitan West High Yield Bond (MWHYX)     
This fund has two calling cards relative to other high-yield bond funds, according to Morningstar associate director of fund analysis Miriam Sjoblom. First, its managers will make adjustments to the portfolio based on the current stage of the credit cycle: Coming into the credit crisis, for example, they had positioned the portfolio conservatively, helping it to hold up much better than other high-yield funds in 2008. In addition, the managers aim to add value with bottom-up research, identifying credits that have been misrated by the major ratings agencies. That strategy, plus an experienced management team of both generalists and specialists, has helped the fund earn a Silver Analyst Rating.

Templeton Global Bond (TPINX)
After a poor campaign in 2011, this fund has rebounded solidly since, and is again attracting investor assets. Amid the streaky year-to-year returns and lumpy fund flows, however, the fund's process is unchanged, with manager Michael Hasenstab focusing on bottom-up country research and adding to his weightings in various countries when their bonds are under stress. 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 hurts the fund on occasion has also set its long-term returns apart.

A version of this article appeared Dec. 12, 2012.

See More Articles by Christine Benz