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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.

The funds in this category span a broad spectrum from the likes of the religiously driven Ave Maria Bond (AVEFX) to the more traditional Fidelity Total Bond Fund (FTBFX). The duration of debt instruments being purchased varies greatly from fund to fund, allowing investors to manage their exposure to interest-rate fluctuations if they so choose. For example, so-called ultrashort funds, such as AMF Ultra Short Fund (AULTX), focus on bonds with durations slightly higher than securities residing in money market funds. Investors can also choose short-term bond funds, like Hartford Short Duration A (HSDAX), as well as intermediate bond funds, such as USAA Intermediate-Term Bond Fund (USIBX), that invest in fixed-income securities with maturities 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.  

Many funds in this group are meant to be core fixed-income holdings, such as JPMorgan Core Bond Fund A (PGBOX). These more-diversified funds 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 January 31, 2012, the group had an annualized return of 4.6%, while the Index reported an annualized return of 5.7%. For five years and three years, the group had gains of 4.7% and 9.9%, respectively, while the Index reported gains of 6.5% and 7.4%, respectively. Over the trailing 12-month period through January 31, 2012, however, the Diversified Bond group reported a return of 1.8%, compared with 0.9% for the Barclays Aggregate Bond Index. 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 is Templeton Global Total Return Fund A (TGTRX). This fund seeks to provide total return, i.e., a combination of interest income, capital appreciation, and currency gains.

The fund invests at least 80% of its assets in fixed- and floating-rate debt securities and obligations, including convertible bonds of governments and corporate issuers worldwide. Bonds include debt securities of any maturity, and can be notes, bills, or debentures. The fund may also invest in securities or structured products that are linked to or derive their value from another security, asset, or currency of any nation. Also, management must be invested in issuers located in at least three countries, including the United States. It may also invest a substantial portion of its assets in developing markets. Since the fund can invest in any country, currency, or fixed-income sector, it can take advantage a diversity of income and capital appreciation opportunities as they arise. As of January 31, 2012, the fund held about 91% of its assets in bonds, with the balance in cash. As of the same date, 45% of its assets were invested in Europe/Africa, 29% in Asia, 14% in the Americas, with the 12% balance in other areas.

Another fund with a solid year-to-date return is Prudential Global Total Return Fund (GTRAX). This fund seeks total return by investing at least 65% of its assets in income-producing debt securities of U.S. and foreign corporations and governments, semi-governmental agencies, investment-grade U.S. or foreign mortgage securities, and bank debt securities or bank deposits. Management may invest in emerging market countries. It looks mostly for countries with strong fundamentals. It may invest up to 35% of total assets in high-yield, high-risk bonds (also known as “junk” bonds), and 10% in “stripped securities” of U.S. and foreign government debt securities. Stripped securities are those with the principal and interest sold separately. Additionally, the fund may hold long or short futures contracts, options, and swap agreements to increase returns and manage risk.

As of January 31, 2012, the fund held about 92% of its assets in bonds, with the balance in cash. As of the same date, 50% of its assets were invested in the U.S., 15% in Europe, 3% in Asia, with 25% in other countries and 7% in cash and equivalents. As of the same date, 34% of its investments are in emerging markets.

A third fund with a good year-to-date return is Franklin Strategic Income Fund A (FRSTX). The fund seeks a high level of current income, with long-term capital appreciation as a secondary goal. It invests at least 65% of its assets in United States and foreign debt securities, including those in emerging markets. Management may invest up to 100% of its assets in high-yield, lower-quality debt securities. Derivative instruments are sometimes used for hedging purposes.

Management uses a top-down analysis of macroeconomic trends combined with a bottom-up analysis of market sectors, industries, and companies to try to take advantage of varying sector reactions to economic events.

As of December 31, 2011, the fund held about 92% of its assets in bonds, with the balance in cash. Further, 55% of its assets were invested in the U.S., 10% in Asia, 3% in Europe, with 24% in other countries and 7% in cash and equivalents. As of the same date, 34% of its investments are in Emerging markets.

In the table below, we have listed 10 top-performing funds through January 31, 2012 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

PIMCO Moderate Duration

PMOPX

7.82

7.82

2.60

1.84

 

 

Templeton Global Total Return A

 

TGTRX

5.36

5.36

2.01

-2.56

 

Lord Abbett Emerging Markets Currency A

LDMAX

4.93

4.93

0.50

-6.20

3.58

 

Loomis Sayles Fixed Income

LSFIX

4.40

4.40

2.69

0.86

8.32

Wells Fargo Adv. Diversified Income Builder A

EKSAX

3.80

3.80

3.97

0.38

2.55

Prudential Global Total Return A

GTRAX

3.77

3.77

-0.70

-2.19

8.30

Nuveen High Income Bond A

FISIX

3.58

3.58

2.83

-1.40

4.65

MorganStanley Flexible Income A

DINAX

3.71

3.71

3.63

3.40

4.94

Northern Multi-Manager High Yield Opportunity

NMHYX

3.55

3.55

2.67

-0.28

 

Franklin Strategic Income A

FRSTX

3.40

3.40

2.38

0.91

6.81

Diversified Bond Objective Group

 

1.81

1.81

1.84

1.70

4.68

 

 

At the time of this report's issuance, the author did not have positions in any of the funds mentioned.