How to diversify bonds through mutual funds


June 27, 1993|By WERNER RENBERG

"I am interested in purchasing a very diversified bond mutual fund," a Florida reader writes.

"I want to find a fund that has some of everything, including intermediate- and long-term bonds, corporate and government, high-grades, as well as some lower-rated, and both foreign and domestic.

"My stockbroker does not seem to be aware of such a diversified bond fund. Would you know of any like this?"

He doesn't explain why he's interested in such a fund, but it's a good guess that he has a couple of reasons:

* He wants to be invested in all these sectors of the bond market but doesn't want to bother finding suitable funds concentrated in each sector, deciding how much to invest in each fund to maximize his return, changing the allocations when desirable and doing all the paperwork.

* He can't invest enough money to satisfy the minimum initial-investment requirements of all the funds whose shares he would have to buy.

If you, too, want to be invested across the bond-market spectrum, there are several funds to consider.

Lipper Analytical Services generally classifies funds invested in these four broad sectors as general bond funds or flexible-income funds. The former are funds that are invested in corporate- and government-debt issues without quality or maturity restrictions. The latter, which are funds that emphasize income, also may own common stocks.

In the flexible-income group, you will find Janus Flexible Income Fund, MFS Income & Opportunity Fund and Strong Income Fund, as well as T. Rowe Price's Spectrum Income Fund, which invests in other Price bond funds and its Equity Income Fund. All but the MFS fund are no-loads.

The general bond-fund group includes AIM Income Fund, IDS Bond Fund, Keystone B-2 and National Multi-Sector Fixed Income Fund.

Other funds -- sponsored by such companies as Colonial, John Hancock, Oppenheimer, Putnam, and Shearson -- are concentrated in governments, junk and foreign; they bypass investment-grade corporates.

As you study such "some of everything" funds, you'll find that they usually aim to offer high current income and less volatility than a fund concentrated in only one sector.

The underlying assumptions: At any time, one or two sectors may outperform the others -- they may even move in opposite directions. So, managers will try to optimize their funds' asset allocations.

Investing in one of these funds clearly involves betting on both a manager's allocation decisions, which may be constrained by a fund board's policy guidelines, and the quality of his bond selections.

When screening these categories for a bond fund that's likely to appeal to you, be sure to study performance in the context of both the fund's investment policy and the manager's implementation.

Just three years old, Price's Spectrum Income Fund provides the collective judgment of a number of Price's fund managers. Its largest position is in New Income Fund (25 percent), an investment-grade bond fund. The others: High Yield (20 percent), GNMA (15 percent), Equity Income (15 percent), International Bond (12.5 percent), Short-Term Bond (7.5 percent) and Money Market (5 percent).


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