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Value Line’s Diversified Bond objective group consists of funds that invest in a mix of corporate and government fixed-income securities in pursuit of current income.  The definition is broad by design, as it is meant to include bond funds that, effectively, can go anywhere in the fixed-income space.

As bond funds, the offerings in this category must invest the majority of their assets in fixed-income products.  After that requirement, the sky is the limit on what the managers here invest in.  Thus, the funds in this category range from the religiously driven Ave Maria Bond (AVEFX) to the more traditional Fidelity Total Bond Fund (FTBFX).

The objective includes funds with focuses across the duration spectrum, which allows investors to manage their exposure to interest-rate fluctuations if they choose.  These include so-called ultrashort funds, such as AMF Ultra Short Fund (AULTX), that focus on bonds with durations slightly higher than securities that might reside in a money market fund.  The duration focus then moves out to short-term bond funds, like Hartford Short Duration A (HSDAX), followed by intermediate bond funds, such as USAA Intermediate-Term Bond Fund (USIBX), that invest in bonds that are in between short-term bond funds and the type of debt that a long-term bond fund, such as Vanguard Long-Term Bond Index Fund (VBLTX), would own.  The latter category of funds is far less common, since many funds in this group are meant to be core fixed-income holdings, such as JPMorgan Core Bond Fund A (PGBOX), which can act as an investor’s sole bond holding with exposure to multiple bond categories and, usually, bonds across the duration spectrum. 

The group even contains funds with a focus on reducing taxation, such as PIMCO Unconstrained Tax Managed Bond A (ATMAX).  Of course there are index offerings within the group, like T. Rowe Price US Bond Index Fund (PBDIX) or Vanguard Total Bond Market Index Fund (VBTLX). 

The Diversified Bond objective group has been a below-average performer relative to the broader bond market over the long term, as measured by the Barclays Aggregate Bond Index.  For the 10-year period ended May 31, 2010, the group had an annualized return of 4.8%, while the Barclays Aggregate had an annualized return of 6.4%.  For five years and three years, the group had gains of 3.6% and 4.0%, respectively, while the Barclays Aggregate reported gains of 5.2% and 6.6%, respectively.  During the past year, the Diversified Bond group reported a strong return of 13.6% as of May 31st, compared with 8.4% for the Barclays Aggregate Bond Index.  The Diversified Bond objective group currently has a standard deviation of 4.85.  This low volatility reflects the stability that bonds have generally enjoyed in recent years.  Thus, the group has an average Risk Rank of 3, indicating that funds in this group might appeal to many investors looking to limit risk.  That said, investors with a long investment horizon might also want to invest in common equities, a group more likely to outpace inflation. 

A fund with a very good year-to-date return for the five months ended May 31, 2010 is Metropolitan West Total Return Bond Fund (MWTRX).  This fund seeks to maximize long-term total return.  The fund pursues its objectives by investing at least 80% of its assets in a broad range of debt securities, which have a dollar-weighted average portfolio maturity between two and 15 years.  It is limited to no more than 20% of its assets invested in securities rated below investment grade. The fund may invest up to 25% of its assets in foreign securities that are denominated in U.S. dollars, up to 15% of its assets that are not denominated in U.S. dollars, and up to 10% of its assets are in emerging market securities.

As of March 31, 2010, the fund held about 26% of its assets in corporate bonds.  The balance was invested in commercial mortgage securities, asset-backed securities, U.S. government agency issues, eurodollar obligations, municipal bonds, and 6% in money market instruments, short-term U.S. Treasuries, and short-term commercial paper.  As of the same date, about 80% of its assets were invested in U.S. securities.

Another fund with a good year-to-date return is Putnam Diversified Income Fund A (PDINX).  This fund seeks to provide a high level of current income consistent with the preservation of capital.  To achieve this objective, the fund invests at least 80% of assets in a portfolio of mortgage-backed bonds, high-yield corporate, emerging-markets corporate, and government bonds.  The fund may acquire bonds that are rated investment grade or below investment grade.  It may also invest in short-term and/or long-term bonds.  As of March 31, 2010, the fund investments consisted of about 54% investment grade bonds and 47% below investment grade.  For the year ended December 31, 2009, the fund’s portfolio turnover rate was 223%.

A third fund with a good year-to-date return is Ridgeworth Total Return Bond Fund A (CBPSX). This fund’s objective is total return that consistently exceeds the total return of the U.S. investment-grade bond market.  To achieve this objective, the fund normally invests at least 80% of net assets in investment-grade fixed-income securities.  These securities include government, corporate, and mortgage/asset-backed securities.  The fund may invest in obligations of U.S. and non-U.S. issuers.  It may also invest up to 20% of its assets in securities that are rated below investment grade.  The fund will typically have a duration of between three and six years, which is considered intermediate term by most investors.  In response to unfavorable market conditions, temporary investments in cash or cash equivalents may be made. 

In the table below, we have listed 10 top-performing funds through May 31, 2010 from our Fund Advisor database.

10 Top Diversified Bond Funds Performance

Fund Name

Ticker

% Year-to-date

Total Return

% 1-Month

Total

Return

% 3-

Month

Total

Return

% 6-Month

Total

Return

% 5-Year

Total

Return

Annualized

Frontegra Columbus Core Plus

FRTYX 

5.30

0.77

2.57

4.31

 

 

Putnam Diversified Income A

 

PDINX 

5.09

-0.65

3.33

7.79

4.43

Optimum Fixed Income A

OAFIX 

4.90

-0.74

2.28

5.24

5.92

 

Legg Mason Partners Core Bond A

TRBAX 

4.60

-0.12

1.83

3.83

4.39

Marshall Intermediate Bond A

MRBAX 

4.95

0.39

2.53

3.85

4.24

RidgeWorth Total Return Bond A

CBPSX 

4.49

1.05

2.78

3.00

5.51

Oppenheimer Strategic Income A

OPSIX 

4.56

-2.33

2.73

4.39

4.47

ING Intermediate Bond A

IIBAX 

3.92

-0.47

1.49

3.94

3.13

Fidelity Adv. Investment Grade Bond A

FGBAX 

4.30

0.39

2.16

3.16

3.72

Wells Fargo Adv Total Return Bond A

MBFAX 

4.30

1.08

2.14

2.81

5.53

Diversified Bond Objective Group

 

2.91

-1.05

1.30

2.66

3.59