Top Bond Funds

4/16/2012


Bonds are often an afterthought when stocks rally. But that does not mean investors should forsake bond funds. Whether you hope to reduce portfolio volatility, generate income, or both, the 12 standout bond funds listed in the table below deserve consideration by most investors.

All 12 funds share these appealing characteristics:

• Above-average scores in our fund-scoring system, with most funds ranking in the top 15% of their category.

• No loads and reasonable expense ratios. Expenses are an outsized drag on bond-fund returns, especially with yields so low.

• Competitive yields and solid performance, with nearly all posting three- and five-year total returns above category averages.

STANDOUT BOND FUNDS
Below we present averages for bond funds in 12 categories and a top selection in each group. Standard deviation measures volatility of monthly returns. Sharpe ratio measures excess return relative to volatility — the higher the better. SEC yield estimates the fund's yield based on dividends from the last 30 days, net of fees and expenses. Blend funds typically hold both corporate and government bonds.
-------- Total Return --------
------------- Last 10 Calendar Years -------------
Bond Fund
Category
1
Year
(%)
5 Years
(Annual.)
(%)
10 Years
(Annual.)
(%)
No. Of
Losses
Worst
Return
(%)
Best
Return
(%)

Standard
Deviation
(%)

Sharpe
Ratio
Top Pick (Price; Ticker)
Fund
Score
SEC
Yield
(%)
Emerging
Markets
4.8
7.4
10.6
1
(17.6)
32.4
11.4
0.78
Fidelity New Markets
($16; FNMIX)
100
4.8
High-Yield
(Junk)
3.3
5.5
7.3
2
(26.4)
46.7
10.2
0.56
T. Rowe Price High-
Yield ($7; PRHYX)
72
6.1
Inflation-
Protected
10.5
6.6
6.8
1
(4.1)
14.8
7.3
0.67
Vanguard Infl.
Protected ($14; VIPSX)
100
(0.8)
Inter.-Term
Gov't
7.5
5.7
4.8
0
1.9
9.2
3.4
0.82
Vanguard GNMA
($11; VFIIX)
95
2.8
Inter.-Term
Blend
7.2
5.8
5.4
1
(4.7)
14.0
4.3
0.78
Vanguard Inter.
Index ($12; VBIIX)
81
2.2
Long-Term
Gov't
33.6
10.5
8.6
1
(17.5)
32.9
13.3
0.48
Amer. Century Zero
Cpn. ($95; BTTTX)
100
1.6
Long-Term
Blend
14.1
7.0
7.8
1
(3.7)
15.9
8.9
0.65
Vanguard Long-Term
Idx. ($14; VBLTX)
60
3.9
Multisector
4.5
6.0
7.4
1
(15.4)
29.2
6.9
0.81
Fidelity Strategic
Inc. ($11; FSICX)
77
4.0
Short-Term
Gov't
2.4
3.6
3.2
0
1.3
6.9
2.0
0.64
Vanguard S-T Federal
($11; VSGBX)
87
0.5
Short-Term
Blend
2.5
3.5
3.5
1
(4.2)
9.3
2.4
0.64
Vanguard S-T Inv.-
Grade ($11; VFSTX)
95
1.6
Ultrashort
0.7
1.4
2.1
1
(7.9)
6.7
1.7
0.14
Wells Fargo Adv. Ultra
S-T ($9; STADX)
92
1.0
World
3.6
6.1
6.9
2
(3.3)
14.1
7.1
0.72
Managers Global
Inc. ($20; MGGBX)
93
2.3

There is no cookie-cutter approach to bond investing. The optimal fund and portfolio allocation depends on your goals, risk tolerance, and time horizon. In general, investors many years from retirement may invest in any of the funds listed in the table, though long-term bond funds have limited appeal given their outsized performance in recent years. Investors with a limited time horizon should favor high-quality intermediate- and short-term bonds. Finally, investors who can afford to take on more risk should consider emerging-market, high-yield, and world bond funds as part of a diversified bond portfolio. Two top picks are profiled below.

Vanguard Short-Term Investment-Grade ($11; VFSTX) is a recommended core holding. The fund holds primarily high-quality corporate bonds with maturities of less than three years. The fund, yielding 1.6%, has an expense ratio of 0.22%.


T. Rowe Price High Yield ($7; PRHYX), which earns a solid fund score of 72, is taking the place of Wells Fargo Advantage High Income ($7; STHYX) in our recommended fund portfolios. The T. Rowe fund, which invests mostly in lower-quality junk bonds, yields an attractive 6.1%.

OUR RECOMMENDED MUTUAL FUNDS
Through April 10, our recommended Growth Portfolio has gained 7.5% so far this year, versus a 7.4% gain for its benchmark portfolio. The Conservative Portfolio is up 6.8%, versus 5.6% for its benchmark.
-- Year-To-Date --
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
Buffalo Growth ($27; BUFGX)
8.8
E
12
12
79
Dreyfus Midcap Index ($28; PESPX)
8.1
C
0
0
68
Dreyfus Small Cap Stock Index
($21; DISSX)
6.2
C
0
0
90
Homestead Small Company
($24; HSCSX)
6.1
C
7
8
98
Manning & Napier International
($8; EXITX)
4.1
D
7
7
67
T. Rowe Price High Yield
($7; PRHYX)
5.1
B
5
5
72
T. Rowe Price New Horizons
($34; PRNHX)
10.7
A
10
10
100
Vanguard 500 Index ($125; VFINX)
8.6
C
6
7
81
Vanguard Dividend Growth
($16; VDIGX)
4.2
E
12
12
90
Vanguard Emerg. Mkts. Stock Indx.
($27; VEIEX)
10.2
C
0
4
79
Vanguard GNMA ($11; VFIIX)
0.9
B
5
4
95
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
1.9
C
0
0
70
Vanguard Selected Value ($20; VASVX)
5.6
D
5
6
88
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
1.7
B
0
0
95
Vanguard Total Bond Mkt. Index
($11; VBMFX)
1.0
E
9
0
50
Vanguard Total Int'l Stock Index
($14; VGTSX)
6.5
C
5
4
82
Vanguard Wellesley Income
($23; VWINX)
3.0
E
0
0
100
Vanguard Wellington ($33; VWELX)
5.0
D
6
9
92
Wasatch International Growth
($20; WAIGX)
14.3
A
5
5
95
Wells Fargo Advantage Discovery
($26; STDIX)
12.5
A
6
7
92
* Year-to-date ranks through April 10from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%;
E = bottom 20%. Fund ratings are percentile ranks based on our fund-rating system.

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