Best Bond Funds for 2013 and BeyondDecember 5th, 2012 by David Waring
One of our primary goals here at Learn Bonds is to make the process of choosing a bond fund easy. With this goal in mind we launched our free bond fund rating reports, called LB Ratings, earlier this year. While we put our stamp of approval on all the funds we rate 4 and 5 stars, we do have our favorite from each category. Here are our top picks for the best bond funds for 2013 and beyond. If you are not sure which category is right for you go here.
Best Bond Funds for 2013: Core Bond Fund Category
Winner: DoubleLine Total Return Fund (Ticker: DLTNX) – We love everything about the DoubleLine Total Return Fund. First off our best bond funds for 2013 core bond fund pick sports an impressive yield of around 6%. This is especially impressive in this low yield environment where most high yield bond funds do not yield significantly more than that. The fund’s total return is equally impressive. Since its inception in late 2009, the fund is up over 13% per year. What we like best about the fund however, is that it currently has a duration of around 1.5. This means that the fund is well positioned if interest rates move higher. A fund with a high yield and total return, combined with a low duration is a very rare find.
While the DoubleLine Total Return fund has only been around since late 2009, its lead portfolio managers Jeffrey Gundlach and Philip Barach have been in the bond fund management business a long time. Prior to founding DoubleLine Capital, they managed the TCW Total Return fund for many years which had an equally impressive track record under their stewardship.
You can read more about the Doubleline Total Return fund in our free rating report here.
Runner Up: PIMCO Total Return ETF (Ticker: BOND) - The PIMCO Total Return ETF is new on the scene as of March of this year. It is however meant to be the little brother of the PIMCO Total Return Mutual Fund, which is the largest mutual fund in the world. It has attracted so much money for good reason, as its performance has been in the top 10 of all core bond funds for the last 1, 5 and 10 year periods. While we give the PIMCO Total Return Mutual Fund our highest rating of 5 stars, we are giving the runner up award in our Best Bond Funds for 2013 picks to the BOND ETF for the following reasons:
- The PIMCO Total Return ETF has lower expenses than the PIMCO Total Return Mutual Fund.
- The ETF is outperforming the Mutual Fund version of the fund, a trend we expect to continue. (You can read more about this here).
For more read our rating report on the PIMCO Total Return Fund.
Best Bond Funds for 2013: Municipal Bond Fund Category
Winner: Vanguard High Yield Tax Exempt Fund (Ticker: VWAHX) - The Vanguard High Yield Tax Exempt Fund provides a full percentage point more yield than its investment grade counterpart the Vanguard Intermediate Term Tax Exempt Fund (VWITX). The thing we like best about this fund however, is that it provides that extra yield while taking less risk than the average high yield municipal bond fund. The Vanguard High Yield Tax Exempt fund has a 95% correlation with the Barclays Investment Grade Municipal Bond Index.
We also love Vanguard funds in general, because they never come with a front end load and their annual expense ratios are some of the lowest in the industry. The fund has two share classes. The first is the investor grade share class which requires a minimum investment of $3000 and has an expense ratio of .20%. For those with $50,000 or more to invest, the fund’s admiral share class has an expense ratio of only .12%.
You can read more about the Vanguard High Yield Tax Exempt Fund in our free rating report here.
Best Bond Funds for 2013: Short Term/Low Duration Fund Category
Winner: MassMutual Premier Short-Duration Bond S (Ticker: MSTDX) – It is getting harder and harder to find good yields anywhere in the bond market, and that’s especially true in the short duration fund category. With a yield of 1.71% the MassMutual Premier Short-Duration Bond S Fund is about as good as it gets, unless you want to take a fairly significant amount of credit risk and/or interest rate risk.
Our best bond funds for 2013 short duration category pick yields about 3 or 4 times what a AAA rated short duration government bond fund is going to get you. While that extra yield comes with some extra risks, this is still a conservative fund. The average credit rating of the bonds it holds is A, so still high investment grade. With a duration of 1.4, the fund is taking very little interest rate risk. Lastly it has an expense ratio of .55%, so you are still getting +1% yields after fees which is good in today’s low yield environment.
You can read more about the MassMutual Premier Short-Duration Bond S in our free rating report here.
Best Bond Funds for 2013: High Yield Fund Category
Winner: Delaware High-Yield Opportunities Fund (Ticker: DHOIX) – While past performance is not necessarily indicative of future results, the Delaware High-Yield Opportunities fund has one of the best short and long term track records you will find in the high yield space. However, unlike other popular high yield funds, like the Vanguard High Yield Fund which had to close because it got too large, this fund still has less than $1 Billion under management. To us that means its still small and nimble enough to take advantage of opportunities that larger funds may not be able to, something that should aid in performance going forward.
One thing to note here is that the primary goal of the Delaware High-Yield Opportunities Fund is total return, so if you are looking for a fund to provide you with a high level of income from dividend distributions, then you may want to look elsewhere. At the end of the day however what investors should be focused on is how much money a fund generates in total, which is why the Delaware High Yield Opportunities Fund is our top bond funds for 2013 high yield category pick.
You can read more about the Delaware High-Yield Opportunities Fund in our free rating report here.
Best Bond Funds for 2013: Long Duration Fund Category
Winner: PIMCO Long Duration Total Return P (Ticker: PLRPX) – The PIMCO Long Duration Total Return fund is the long duration brother of the PIMCO Total Return Fund. As interest rates are currently at historical lows, it seems counter intuitive to us that one would want to invest in a fund that will be hit especially hard if interest rates rise. However if you feel that interest rates are going to drop even lower and want to get the maximum bang for your buck, then its going to be hard to beat the PIMCO Long Duration Total Return fund. Like the PIMCO Total Return Fund, the fund’s mandate allows it to invest across the fixed income universe. We feel this is important because it allows the fund’s portfolio manager a lot of extra flexibility to search for areas that will provide the best total return.
Currently the fund’s duration is 13.86 which is high even for the long duration category. This means that when interest rates drop you should expect best bond funds for 2013 long duration pick to outperform. Since interest rates have been on pretty much a straight line lower since the fund was started in 2008 it has outperformed the average long duration bond fund by an average of 3.10% per year. Duration is however a double edged sword, and you should expect this fund to underperform other funds in its category when interest rates head higher.
If you would like to learn more about the PIMCO Long Duration Total Return Fund read our free rating report here.
If you would like to learn more about these and other bond funds, visit the LB Ratings page here at Learn Bonds.