Multisector bond funds dwell in realm of unpredictability

Safer bets cut exposure to emerging markets

Dollars & Sense

April 29, 2001|By Eric Jacobson | Eric Jacobson,MORNINGSTAR.COM

Multisector bonds used to be a lot easier to define. When they came into vogue in the early 1990s, their profiles were fairly consistent. Throw together foreign, U.S. government and domestic high-yield bonds, in equal parts, and in theory you had a portfolio for all seasons.

The idea was to invest in very different sectors to obtain a less-correlated, diversified portfolio. Over the years, however, funds have strayed from that prototype, often loading up on one sector or another, and sometimes substituting emerging-markets debt for the foreign portion of a fund. In many cases the goal has been to prop up a fund's yield to try to make it more attractive.

Funds that have elected to go the emerging-markets route have generally been more volatile, with their returns bouncing around the category.

When crises flared in Asia and Russia in 1998, for example, some funds endured losses even though high-quality domestic bonds were rallying hard.

Overall, we're not crazy about too many of these portfolios, given their unpredictable nature. We like a couple, though, and are more comfortable with those that have elected to keep their emerging-markets exposure relatively low.

In fact, the two funds that made the list have lower-than-average volatility, which is a big plus for any fixed-income investor.

John Hancock Strategic Income A (JHFIX) - Consistency is one element that is often lacking in this category, and that has been the main strength of this portfolio, which - notwithstanding performance during the early part of 2001 - tends to perform in the upper echelons of its peer group.

T. Rowe Price Spectrum Income (RPSIX) - Structured as a fund of funds, this portfolio offers access to seven T. Rowe Price bond portfolios that span sectors from high-quality debt to high-yield and emerging-markets bonds. It even holds about 12 percent of assets in the firm's equity-income fund.

The portfolio - which carries a high-yield stake that is less than 25 percent of assets - tends to lag behind other multisector funds when junk bonds thrive, as most rivals load up on high-yield debt. Conversely, it can shine when high yield is weak and Treasuries are on the upswing.

Overall, the fund is well diversified, and it has a solid long-term record despite occasional hiccups.

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