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Extra
The best bond funds for rising interest rates
With higher rates a virtual certainty, the smartest path for bond investors is to go short.
By Steven T. Goldberg, Kiplinger
Its hardly a secret: Interest rates are almost surely heading up. This puts bond-fund investors in a bind because higher rates mean lower prices. The best strategy: Own funds with relatively short maturities because they should hold up better in a rising-rate environment.
Harbor Bond
The anchor of your fixed-income portfolio should be Harbor Bond (HABDX). This fund is managed by Pimcos redoubtable Bill Gross, who is known for his uncanny ability to forecast the direction of interest rates. In each year since 1995, Harbor Bond has finished in the top 40% of its category -- funds that invest in high-quality, intermediate-maturity bonds. Its 7% annualized return over the past decade is one and a half percentage points ahead of the category average. Recently, the funds average maturity was nearly seven years, and it sported a yield of 2.5%. Be aware that the New Jersey attorney general recently accused Pimco of permitting rapid trades in several of its funds (but not Harbor Bond, for which Pimco is the sub-adviser).
Loomis Sayles Bond
A more aggressive choice is Loomis Sayles Bond (LSBRX). Dan Fuss, who launched the fund in 1991, has been in the bond business since 1958. Now 70, he hasnt let age slow him down. Fuss and co-manager Kathleen Gaffney, 62, invest in all kinds of bonds, most of them high-quality, from all over the world. Loomis Sayles Bond has run rings around other similar funds (those that invest in different types of bonds from all over the globe), landing in the top 40% of the group in seven of the past ten years. Over that period, the fund returned an annualized 10%, four percentage points per year ahead of the average. Recently, the fund had 36% of its assets in short-term foreign bonds, which should perform well if the dollar keeps weakening. The fund yields 5.9%.
| The 5 best bond funds | | Fund | 1-yr | 3-yr | 5-yr | Expenses | Toll-free number | | Fidelity Floating Rate High Income (FFRHX) | 6.2 | 4.1 | -- | 0.86 | 800-544-8888 | | Fidelity Spartan Interm Municipal Income (FLTMX) | 6.2 | 6.8 | 5.8 | 0.43 | 800-544-8888 | | Harbor Bond (HABDX) | 4.9 | 8.3 | 7.6 | 0.58 | 800-422-1050 | | Loomis Sayles Bond (LSBRX) | 23.6 | 13.6 | 10.4 | 1 | 800-633-3330 | | Vanguard Intermediate-Term Tax-Exempt (VWITX) | 5.7 | 5.9 | 5.4 | 0.17 | 800-635-1511 |
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Fidelity Floating Rate High Income
You may wonder how we can call a fund thats less than 4 years old a gem, but Fidelity Floating Rate High Income (FFRHX) is certainly one of the best to buy now. Few bond funds will protect you better from rising rates. Floating Rate invests primarily in senior bank loans. Interest rates on those loans are typically reset every three months, meaning that both the funds yield and its price should rise if short-term rates do. The fund mostly invests in loans that are made to weaker companies, but manager Christine McConnell, 46, says that her analysts painstakingly research the loans to avoid ones that may go bad. The average maturity of Floating Rates investments is less than four years, and the fund yields 3.2%. Over the past three years, it returned 4% annualized.
Vanguard Intermediate-Term Tax-Exempt
If youre investing in a taxable account and youre in a high tax bracket, youll probably do better with a municipal-bond fund. Vanguard Intermediate-Term Tax-Exempt (VWITX), for example, yields 2.7%. But because the interest it pays is exempt from federal income taxes, thats the equivalent of 3.8% from a taxable investment for someone in the 28% bracket. The average maturity of the funds holdings was recently six years. Run by Christopher Ryon, the fund benefits from minuscule annual expenses of 0.17% and was in the top 20% of intermediate-term muni-bond funds over the past five years, with an annualized return of 5%.
Fidelity Spartan Interm Municipal Income
Another fine choice is Fidelity Spartan Interm Municipal Income (FLTMX). Despite slightly higher annual fees (0.43%), the fund, which is managed by Doug McGinley, returned slightly more (0.4 percentage point per year) than its Vanguard counterpart over the past five years. The average maturity of its holdings is eight years, and the fund yields 2.7%.-- Reporter: Katy Marquardt Return to "The 25 best mutual funds"
2004, The Kiplinger Washington Editors, Inc.
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