What You Should Know Before Choosing a Core Bond FundJuly 12th, 2012 by David Waring
Core bond fund is the name given to bond funds that act as the centerpiece of your bond fund investments. They are generally well diversified across the US Investment grade bond market which includes US Government, Corporate, Agency and Mortgage related bonds (tax free municipal bond funds are not normally included). A core bond fund can be the only bond fund an investor holds, or used as the anchor bond fund in their portfolio, which is then supplemented with smaller investments in other bond funds like emerging market and high yield bond funds.
Our Core Bond Fund Ratings
|Fund Name||Active or Passive?||LB Rating||LB Rating Report|
|DoubleLine Total Return Bond Fund (DLTNX)||Active||5 Stars||DLTNX LB Rating Report|
|PIMCO Total Return Fund (PPTDX)||Active||5 Stars||PPTDX LB Rating Report|
|Vanguard Total Market Bond Fund (BND)||Passive||5 Stars||BND LB Rating Report|
|iShares Barclays Aggregate Bond Fund (AGG)||Passive||4 Stars||AGG LB Rating Report|
|Western Asset Core Plus Bond Fund (WACIX)||Active||4 Stars||WACIX LB Rating Report|
|Vanguard GNMA Fund (VFIIX)||Active||4 Stars||VFIIX LB Rating Report|
|Loomis Sayles Investment Grade Bond Fund (LIGRX)||Active||3 Stars||LIGRX LB Rating Report|
|JP Morgan Core Bond Fund (PGBOX)||Active||3 Stars||PGBOX LB Rating Report|
|Bond Fund of America (ABNDX)||Active||2 Stars||ABNDX LB Rating Report|
Most bond funds in the Intermediate Term Bond Fund category, which are funds that hold bonds with an average maturity of between 4 and 10 years, also match the above description, and are therefore considered to be core bond funds as well. The performance of both intermediate term and core bond funds is normally measured or “benchmarked” against the Barclays Aggregate Bond Index which holds the following types of bonds:
|Bond Type||Percentage of Index (June 2012)|
|US Treasury (excluding TIPs)||34.96%|
|Mortgage Backed Securities (Investment-Grade)||30.64%|
|Corporate Bonds (Investment-Grade)||20.58%|
|Asset Backed Securities||.25%|
|Commercial Mortgage Backed Securities||1.88%|
The index includes bonds from short to long term, however the average maturity of the index is in the intermediate range (currently around 5.1 years).
If the fund is a passively managed index fund then it will strive to match all 4 variables in the index (bond type, rating, maturity and weighting) as closely as possible. If the fund is an actively managed fund then it will generally also match the index in terms of the type and rating of the bonds they hold. However, they will try to outperform the index by adjusting the maturity and weighting of the bonds in their portfolio vs the index. They do this based on where they think there is additional return to be had that the index is not capturing, like giving more weighting to corporate bonds with shorter maturities for example.
Some funds, like the popular PIMCO Total Return fund will also hold high yield and bonds from countries outside of the US in their portfolio. Even though they do not match the traditional definition of Core Bond funds which is to only hold US Investment Grade Bonds, these “non-core” investments normally make up a relatively small part of their portfolio. They are therefore still considered to be core funds by most, however some categorize them as “Core-Plus” since they hold assets outside of the norm for the category.
If you are investing in a well established intermediate term core bond index fund then the performance from one fund to another should track closely. For this reason your primary concern will be minimizing fees. With an expense ratio of .10% the Vanguard Total Bond Market Index Fund (Ticker: VBTLX) is a good place to start. It is also the largest bond index mutual fund in the world.
If you are considering going with an active manager then it is important to realize that the performance of one actively managed core bond fund vs. another can vary widely. While all core bond funds will have many things in common, how a portfolio manager weights their portfolio in different sectors of the market and among different maturities can have a large affect on performance.