Fixed income gurus, financial media talking heads and asset managers have been forecasting rising interest rates for at least two years. They were (and still are) wrong.
Even as recently as one week ago, bond prices took a hit on news of a jobs report that showed a pickup in hiring last month, but prices picked back up this week after Fed minutes revealed that some participants wanted to err on the side of patience to keep supporting the world’s largest economy for longer than expected.
This type of mixed news and uncertainty is likely to continue as the fear of a weaker economy outweighs the fear of inflation. But even if rates start rising in 2015, as is currently expected, it doesn’t mean panic and mass exodus from bonds.
Needless to say, investors in bond funds have been challenged to do a good job of managing the fixed income portion of their portfolios. With that in mind, here are 3 bond funds to buy now for uncertain economic and market conditions.
Vanguard Total Bond Market Index (VBMFX)
Conventional wisdom says bond index funds are a bad idea when interest rates are rising. But there are two problems with this statement: 1) Conventional wisdom has been mostly wrong about the bond market in recent years and 2) no wise investor tries to predict when interest rates will rise.
For this reason, a solid, diversified, low-cost index fund, such as Vanguard Total Bond Market Index (VBMFX), serves the wise investor’s purposes in uncertain times.
I recently highlighted the best and worst funds for rising interest rates and illustrated how the Total Bond Index fund was neither the highest or lowest performer, compared to long-term, short-term and inflation-protected bond funds during the last period of rising rates, which was between 2004 and 2007.
Over the past 3 months, as uncertainty in capital markets has cranked up, VBMFX outperformed 86% of all intermediate-term bond funds, which includes those that are actively-managed. The fund is also ahead of the category averages for year-to-date performance.
In summary, active managers can lose to the head fakes of interest rates and passive funds don’t flinch.
VBMFX can be bought for an initial purchase amount of $3,000.
TCW Total Return Bond N (TGMNX)
I’ll step down from the passive-investing soap box now and praise the value of owning an actively-managed bond fund, which of course depends completely on the skill and experience of the fund manager(s). TCW Total Return Bond N (TGMNX) is a fine example of a well-managed bond fund.
Look no further than the outstanding performance record, which boasts no calendar year of negative performance going back 10 years. Although the current management team goes back 5 years, their 5-year annualized return of 6.8% beats 93% of all intermediate-term bond funds.
The TCW Total Return Bond fund specializes in mortgage bonds but balances risk with US Treasury bonds. The management also has illustrated skill in navigating risk as evidenced by the 1.4% gain in 2013, when the Barclays Aggregate Bond Index fell -2.0%.
You can get into TGMNX with an initial purchase of $2,000.
Loomis Sayles Bond Retail (LSBRX)
Loomis Sayles Bond Retail (LSBRX) is a well-managed, go anywhere bond fund that certainly comes with its share of market risk but long-term investors willing to hold on during turbulent periods can be handsomely rewarded.
The fund’s relatively high correlation with equity markets comes from its exposure to high-yield bonds. However, with legendary fixed income portfolio manager Dan Fuss involved investors can rest easy with his 50 years of experience driving the ship.
Over the past three years, which marks a time when many seasoned bond fund managers thought rates would start rising, LSBRX outperformed 86% of its multi-sector bond peers with a 9.3% 3-year annualized return.
Again, just remember that uncertainty cuts both ways with short-term price fluctuation. For example, in the depths of the last bear market, in 2008, LSBRX fell -22.1%. But if you are a long-term investor, especially one who believes the a go anyhwere style is just the flexibility needed to navigate these unpredictable times in fixed income, you are likely to be happy with Loomis Sayles Bond.
The initial purchase price for LSBRX is $2,500.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.
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