4 Bond Fund Ideas to Flesh Out Your IRA

Christine Benz: Hi, I'm Christine Benz from Morningstar. It's IRA season and many investors may be on the hunt for some type of a bond holding. Joining me to share some bond funds that would be appropriate for an IRA is Karin Anderson. She's director of fixed income manager research for Morningstar. Karen, thank you so much for being here.

Karin Anderson: Hey, Christine, great to be here. Thanks.

Benz: Good to have you. So, I think a lot of investors, if they're looking at their asset allocations today--we've had this great long-running rally in the equity market, meanwhile, we're all getting older and closer to retirement--so many investors, if they're looking at their asset allocations, might say, "I really need to top up my bond exposure." So you brought some funds that you think would be good--core to core-plus, and we'll explain the difference--holdings for bond portfolios. So let's start with a couple of funds--a pair of funds--that you and the team really like. These are both Gold-rated: Baird Aggregate Bond and Baird Short-Term Bond. Let's talk about why you think they are good, very high-quality holdings.

Anderson: These are a couple of strategies that we really like in the intermediate space. They have always been investment-grade-focused, and the team really sticks to what it does best. It's a cash bond shop. There's nothing fancy here, no derivatives. It's really all about security selection, mostly in corporates, and they're not trying to make interest-rate bets. So the strategies are going to be very closely linked to the aggregate or the short-term index that the short strategy uses. So it's what you see is what you get and that's what's really nice about this. The team at Baird does a really good job of its credit work and that part of the credit spectrum. I think that it's just a nice diversifier. Both would be a nice diversifier to a very equity heavy portfolio and give you that protection that you need when ...

Benz: Ballast.

Anderson: Correct.

Benz: The Baird Aggregate Bond is in our intermediate-term core category.

Anderson: Correct.

Benz: So generally speaking, these have really high credit qualities, but you say that you and the team actually like this fund, or at least performance has been better than you might get with a total bond market index.

Anderson: Right. These are active managers that we're putting to a test here. We're expecting them to beat some of the very low-cost passive ETFs that are tracking the Agg or other short indexes, and they have a track record of doing that and that is why they get our highest rating.

Benz: So for investors who are willing to step out on the risk spectrum a little bit in search of some extra income, you think that the core-plus intermediate-term bond category might be a place to look. So let's talk about that category and then let's talk about a fund that you like in that space, and there are several of course, but BlackRock Total Return is one that you and the team like and rate as Gold currently. But first, let's just talk about what core-plus is.

Anderson: Sure. Core-plus--these are strategies that have at least 5% in high-yield so that already makes them a bit more aggressive than the Aggregate index. Some of these strategies are going to be pretty close to that 5% high-yield mark forever; others are going to be quite a bit more aggressive--up to a third of assets in high-yield. There are some different performance profiles here, for sure, but they are going to maybe have a little bit tougher time and stress moments for credit. They aren't going to give you that ballast that those core funds I mentioned would give you because, you know, they simply aren't in any high-yield.

Benz: Right.

Anderson: You're probably going to get some return from core-plus funds, but over time you should also expect a higher return. So BlackRock Total Return is one of our favorites in this space. This team does a lot of things well across corporates, securitized U.S., non-U.S. They're very attuned to risk management. We appreciate all the things that they do there. I think it's overall a really nice package in terms of getting exposure to lots of different parts of the bond market.

Benz: Another fund that you and the team like that is also core-plus is Pimco Active Bond ETF. So this is an active exchange-traded fund. We don't talk about these very often. Let's talk about the pivot that went on with the funds' underlying strategy, and also I'd like to talk about why you and the team think that this is a nice backdoor way for investors to gain access to Pimco without necessarily paying a sales charge or maybe if they're do-it-yourself type investors.

Anderson: This is an interesting strategy in that it used to be styled after Pimco's flagship fund, the Total Return fund, and in May 2017, it had a makeover with a new management team, which we think highly of, and the strategy was changed to allow for more high-yield exposure so they can take up to 30% of the portfolio in high-yield debt. In tandem, they reduced the allowance for non-U.S. currency exposure, which does not help for that good income generation goal that they're going for. They also allowed for a little bit more duration risk--a little bit more allowance there for the managers. With that flexibility, good risk management is required, but these are things that we think Pimco can do well.

Benz: So like BlackRock Total Return, this one is going to be appropriate for investors who are willing to step out on the risk spectrum a little bit. It sounds like its potential to have significant high-yield exposure and some other features might give it a little more volatility on a day-to-day basis, but the income stream should help.

Anderson: That's right. And the fees are quite good in the overall core-plus space, so that's another reason to give it a look.

Benz: A big plus with any fund, especially bond funds. Right?

Anderson: Exactly.

Benz: Karen, great to get your insights. Thank you so much for being here.

Anderson: Thanks, Christine.

Benz: Thanks for watching. I'm Christine Benz for morningstar.com.