3 Best Ideas Among Core Bond Funds

Karen Wallace: The Federal Reserve has telegraphed its intent to continue modestly raising the fed funds rate and downsizing its balance sheet, both of which raise fears that bond yields will increase. Investors worried about the potentially negative effects on bond prices and bond mutual funds may wonder if they should dial back their bond exposure, or if they need an allocation to bonds at all.

And while investors with longer time frames may not need an allocation to fixed income, those nearing or in retirement can definitely benefit from the downside protection and diversification a bond fund can provide. We asked our fund analysts to share some of their best ideas among core bond funds.

Emory Zink: Gold rated Fidelity Total Bond stands out for making the most of its wide mandate. In addition to investing in U.S. investment-grade bonds, similar to its Bloomberg Barclays aggregate index, the portfolio management team also has the flexibility to invest in emerging-market debt and U.S. high yield, up to 20% of the portfolio, as well as international bonds.

Ford O'Neil has managed this fund since 2004, and while he coordinates from the top, at Fidelity it's really a team-managed approach. When Ford O'Neil has questions related to mortgages, municipals, or credit, he can ask questions of sector specialists from across Fidelity, many of whom have distinguished records managing sector-specific funds in their own right.

Generally speaking, when risk off fervor takes hold in the markets, this fund is going to modestly lag its peers, but when bouts of bullishness return, the riskier fare in the portfolio should help this particular fund to shine.

With this fund, experienced management applies discipline and insight to a broad investment menu resulting in attractive longer term performance. When combined with low fees, produces a compelling choice for an investor seeking a one-stop-shop bond option.

Alex Bryan: Vanguard Total Bond Index Fund is one of the cheapest funds available in the intermediate-term bond category, which is one of principle reasons behind its Morningstar Analyst Rating of Silver. It ranks a float-adjusted version of Bloomberg Barclay US Aggregate Bond index which includes most U.S. corporate, government, and agency-backed investment grade debt with at least one year until maturity.

Because the fund is market-cap weighted, it does tend to skew quite heavily toward Treasury securities which represent just north of 41% of the portfolio. That's about 21 percentage points higher than the category average, so the fund does tend to have a lower average yield to maturity, so it may not always keep up with its peer group.

But because the fund does charge a 5 basis point expense ratio which is 60 basis points less than the typical fund in the category, it should be able to close some of that return gap. And because the portfolio is more conservative, it should hold up better during tough economic environments, and it has tended to exhibit lower volatility than most of its peers.

If you look at the performance of this fund over the trailing 10 years through May of 2017, it has outperformed the category average by about 38 basis points annually, and it did that with less than half the maximum draw down of the typical fund in the category.

This fund's cost advantage and conservative risk profile should continue to serve investors well over the long term.

Cara Esser: With a three- to five year-time horizon, Dodge and Cox Income's managers have an eye for the long term. This approach can lead to periods of underperformance as managers are willing to be patient with their picks. A focus on income as a component of total returns leads to a higher yield than many peers and also a significant overweight to corporate bonds.

This is a concentrated portfolio with around 50 issuers, and managers are willing to take sizable position in downtrodden names. The fund hold upward of 10% in junk-rated debt and an increasing stake in emerging-market debt means the fund's returns can be quite volatile.

For example, in 2015's downturn in the bond market, the fund was among the worst performing in its peer group. The fund however bounced back in 2016 and was among the best performers. The fund has a very strong long-term track record and its fees rank among the lowest in its peer group. In all we think this is a great long-term pick.