Short-term bond funds find profit with varied investment strategies

From well-known names to newfound gems, each brings fair returns

Morningstar

July 02, 2000|By Chris Kelsch | Chris Kelsch,MORNINGSTAR.COM

If you are looking to save money for a goal two to five years away, a short-term bond fund could be right for you. Funds in this category invest across a variety of sectors, including Treasuries, corporate bonds, mortgages and Yankee debt (foreign bonds).

When I made my picks from this category, I focused on offerings that have performed well in a variety of markets. In addition to funds from familiar shops, you'll find a couple of little-known gems here.

* Vanguard Short-Term Bond Index. A manager change usually means a fund gets cut from our analyst-picks list, but I've stuck with this fund even though Felix Lim replaced Chris Alwine in January. The fund still falls under the management of long-tenured bond-index-fund guru Ken Volpert and department director Ian MacKinnon, and newcomer Lim is sticking with his predecessor's successful strategy. He's continuing to track the Lehman Brothers 1-5 Year Government/Corporate Bond index while slightly overweighting the corporate-bond portion of the index.

This approach has helped the fund outperform the vast majority of its peers over time, and the fund's rock-bottom expenses give it a big advantage.

* Hotchkis & Wiley Low Duration. Hotchkis & Wiley sound like makers of fine wine, but the fund family actually makes a nice short-term fund. How? Mostly by keeping the fund's duration shorter than that of its typical peer. A shorter duration translates into less interest-rate sensitivity, and that's what has kept volatility low here. Meanwhile, an overweighting in A- and BBB-rated issues has allowed the fund to deliver excellent yield and total returns.

* Fidelity Short-Term Bond. Manager Andrew Dudley sticks to Fidelity's policy of not making interest-rate bets, shielding the fund from the perils associated with poorly timed interest-rate moves. Because the fund's duration is shorter than that of its average peer, the fund has been relatively insulated from interest-rate fluctuations. An overweighting in mortgages and corporates has boosted returns and yield.

Metropolitan West Low Duration Bond. This fund is only 3 years old, but I like what I've seen from its managers. Members of the management team got their starts as analysts at PIMCO, then put together a good record in a stint at Hotchkis & Wiley, where they managed several funds, including Hotchkis & Wiley Low Duration. A keen eye for value is behind their success at this offering. For example, management loaded up on corporates and asset back-ends when they cheapened dramatically in 1998. Those issues performed well in 1999, helping the fund outpace nearly all its competitors that year.

* Strong Short-Term Bond. It seems as though Strong has a knack for doing things well when it comes to shorter-maturity bonds. Excellent credit research has been the key to this fund's record. That's important, because management tends to invest in more mid- to low-quality bonds than its competition does, so there is a risk tradeoff. This focus on the higher-yielding portion of the bond market has given the fund one of the category's better income payouts. The managers also focus on mortgages and corporates, which have generally outperformed Treasuries for much of the 1990s.

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