Advisors' Favorite Bond Funds

Mark Hulbert reports on a survey that he conducted among 200 advisors of the funds they recommend to clients.  The five most popular funds are bond funds, which, on its face, is surprising, given that most advisors expect interest rates to increase.  However, looking over the lost, it makes sense, especially since bonds are an essential portfolio allocation.  The funds, in order of their popularity:

1. Vanguard GNMA (VFIIX)
2. Fidelity Floating Rate High Income (FFRHX)
3. Vanguard Inflation Protected (VIPSX)
4. Vanguard Short Term Investment Grade (VFSTX)
5. Vanguard High Yield Corporate (VWEHX).

That Vanguard dominates the list is no surprise, since portfolio costs are the most important factor in determining the difference in returns between similar funds.  he Inflation Protected, Short Term Investment Grade and the Fidelity Floating Rate funds all have very low price sensitivity to changes in interest rates.  Finally, the GNMA and High Yield funds will tend to have high coupons for the average maturity of their portfolios.

Of the five, the Short Term Investment Grade is the most straightforward; I have known institutions that use the fund as an alternative to money markets once a prudent reserve is established.  The other four have some hidden weaknesses that an advisor must recognize to use the funds effectively.  The GNMA fund is invested in mortgages, subjecting the fund to the risk of maturity extension.  The Fidelity fund invests in floating rate bank loans, which have a higher credit risk than might be immediately apparent. The Inflation Protected fund is invested primarily in TIPs which currently have extremely low current yields, which could lead to increased volatility.  And the high yield Corporate is a junk bonk fund.

Nothing particularly wrong with any of these funds, but it is important to understand the nature of each to accurately anticipate the performance when risks are realized.