Pile Into Performing Income Funds

A few bond and other income funds stand out

Stocks opened higher yesterday following the pre-opening release of a better-than-expected weekly jobless claims and August factory orders. The factory orders showed a 5.2% decrease and the worst since January 2009, but still exceeded expectations.

The DJIA enjoyed its best day since the Sept. 13 Fed rally and closed at 13,575, up 81 points. The S&P 500 gained 10 points at 1,461, and the Nasdaq rose 14, closing at 3,149. The NYSE traded 674 million shares and the Nasdaq crossed 368 million. Advancers led decliners on the Big Board by 2.6-to-1, and on the Nasdaq, advancers were ahead by just more than 2-to-1.

Today, we will turn from stocks and consider several categories of income funds that investors might want to investigate.

The small investor still is scared to death of stocks. Recent mutual fund figures for September show that stock funds are being sold and bond funds bought at a rate of almost 2-to-1. Despite the very low interest paid on CDs, corporate bonds and government bond funds that actually could result in a negative return after management fees, the public continues to buy them.

There are, however, several categories of income funds that have done relatively well this year and probably will continue to do so. High-yield bond funds are one — like the BlackRock High Yield Bond Portfolio A Shares (MUTF:BHYAX), which has a one-year total return of more than 18%, and a gross expense ratio of 1.07%.

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Preferred income funds have done well, too. The performance of the Flaherty & Crumrine/Claymore Preferred Securities Income Fund (NYSE:FFC) — a listed, closed-end fund — speaks for itself. In addition to a gain of more than 21% this year, the fund pays an annual dividend of $1.63, which at the current price yields 8.09%.

Finally, many municipal bond funds have exceeded expectations. But when choosing a muni fund, it is important to review the portfolio for holdings of bankrupt municipalities and stay away from a fund that holds them. A superb manager, like USAA, provides bond funds from individual states, which are exempt from both state and federal taxes. They are subject to capital gains tax.

The USAA Virginia Bond Fund (MUTF:USVAX) provides a high level of tax-free income to Virginia residents. This year, it has appreciated more than 4% and has tax-free income of 4.1%.

As with all funds, the investor should investigate the manager’s fees and expenses, as well as the past performance. Obviously there are no guarantees of future performance, but the reputation of the fund and its managers is important. A good start in the process of deciding on which bond funds are appropriate would be to check the fund’s Morningstar (NASDAQ:MORN) rating. For example, the Morningstar rating of the USAA fund is five stars, its highest rating.

Conclusion: Bonds have been a poor investment this year and probably will continue to return less than high-dividend equities. But there are exceptions to buying normal corporate or government bonds that have low returns and could have long-term risk — especially when interest rates increase.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

Article printed from InvestorPlace Media, https://investorplace.com/2012/10/pile-into-performing-income-funds/.

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