Corporate bond mutual funds invest in bonds issued by the private sector. A corporate bond typically is a fixed income security that promises to pay interest throughout the term of a bond and principal at its maturity. Depending on the issuer, a corporate bond can be of investment or non-investment grade. That creates a wide spectrum of bond returns due to the differences in default risk.
Corporate bond mutual funds offer a convenient way for investors to gain exposure to fixed income securities without investing the time and transaction costs of buying individual bonds.
As of late 2018, investment-grade corporate bonds offered an average yield of about 4.25%, based on Moody's Seasoned AAA Corporate Bond Yield figures. The yield was 3.51% in 2017. The long-term average was 6.89%. Non-investment grade bonds command a yield that is 3% higher than that for investment grade bonds.
Delaware Extended Duration Bond Fund Class C (DEECX)
Delaware Extended Duration Bond Fund Class C was created on Sep. 15, 1998 and is managed and advised by Delaware Investments, part of the Macquarie Group. DEECX invests at least 80% of its net assets and any borrowings in corporate bonds that have a long duration and investment grade credit rating.
Over the five years ending Nov. 8, 2018, the fund generated an annual average return of 6.96%.
DEECX invests 77% of its assets into corporate bonds, while government and municipal bonds have 17% and 2% allocation respectively. Holdings of the fund are rated BBB- and above by Standard & Poor's or Baa3 and above by Moody's credit agency. DEECX holds 182 securities and its top holdings in late 2018 included corporate bonds of JPMorgan Chase, Pepsico and Duke Energy.
The fund has an average duration of 13.4 years and a trailing 12-month yield of 3.34%. Because of the longer duration, the fund is sensitive to changes in market interest rates.
In November 2018, DEECX had a four-star rating by Morningstar. Its expense ratio is 1.71%. The fund is also subject to a back-end load of 1%.
This fund is most appropriate for investors who would like to gain exposure to highly rated corporate bonds with long duration and have high risk tolerance to interest rate risk and volatility.
Fidelity Corporate Bond Fund (FCBFX)
Fidelity Corporate Bond Fund invests more than 80% of its assets in investment grade foreign and domestic corporate bonds that have interest rate risk similar to the Barclays U.S. Credit Bond Index. Over the five years ending November 2018, the fund demonstrated an average annual return of 3.19%.
The fund invests 90% of its portfolio in corporate bonds, while the remainder is spread out between government bonds and cash. FCBFX's top holdings account included Bank of America, Barclays and Morgan Stanley.
Unlike DEECX, this fund holds corporate bonds with shorter maturities, and its average duration is 6.9 years. For this reason, the fund's returns are less sensitive to changes in interest rates and enjoy a lower volatility. However, this comes at the expense of slightly lower returns generated by the fund.
FCBFX has a three-star rating from Morningstar as of November 2018. It had an expense ratio of 0.45% and no load fee.
This fund is most suitable for investors who want exposure to investment-grade corporate bonds with shorter duration and smaller sensitivity to interest rate risk.
Calvert Long-Term Income Fund Class A (CLDAX)
Calvert Long-Term Income Fund Class A seeks to maximize its returns by investing in U.S. dollar-denominated corporate, government and municipal bonds with investment-grade credit quality. Over the five years ended November 2018, CLDAX generated an annual average return of 5.63%.
Compared to other mutual funds, CLDAX has a somewhat lower concentration on corporate bonds, with about 54% allocation. The rest is allocated among U.S. government bonds with 31% allocation, securitized obligations with 10% allocation, and some cash and municipal bonds holdings. About 16% of the fund's assets are invested in a single U.S. government bond maturing in 2045.
The fund has an average duration of 12.9 years, which makes CLDAX sensitive to interest rate changes.
The fund has a two-star rating from Morningstar and an expense ratio of 1.25%. This class of shares is subject to a back-end load of 3.75%.
The fund is most appropriate for investors who need exposure to corporate bonds but are concerned about default risk and want to hold U.S. government bonds to mitigate their risks.
Federated Bond Fund Class F Shares (ISHIX)
Federated Bond Fund Class F Shares invests in investment grade and non-investment grade corporate bonds. The fund's holdings are highly concentrated on the corporate bonds with over 90% allocation, while government obligations account for less than 5% of the fund's holdings. The fund has generated a five-year average annual return of 3.65% as of Nov. 8, 2018.
Unlike other funds, ISHIX allocated a significant portion of its portfolio to high-yield bonds with 27% allocation. Investment grade bonds account for 71% of the fund's portfolio. The fund's average duration is 5.7 years, making it less sensitive to interest rate changes.
Because the fund's holdings include speculative-grade bonds, returns of the fund are subject to greater default risk. Yet under favorable market conditions, the fund can outperform its peers that invest in investment grade bonds.
The fund had a two-star rating from Morningstar in late November 2018. It has an expense ratio of 1.02%. The F class of shares for Federated Bond Fund carry a back-end load fee of 1%.
ISHIX is most appropriate for investors who would like to have exposure to investment grade and speculative bonds that may have higher rates of return under favorable bond market conditions.
Lord Abbett Income A (LAGVX)
The Lord Abbett Income A mutual fund invests in both investment grade and high-yield corporate bonds, but with a greater emphasis on bonds on a lower range of the investment grade spectrum. The fund demonstrated a five-year average annual return of 4.52% as of Nov. 8, 2018.
The fund allocates about 65% of its holdings to corporate bonds, while securitized fixed income instruments account for about 24%. LAGVX's securities with lowest investment grade rating of BBB have 54% allocation and speculative securities in the fund's portfolio have about 20% allocation. The fund has an intermediate average duration of 5.59 years.
LAGVX has a two-star rating from Morningstar and commands an expense ratio of 0.78%. The fund also charges back-end load fee of 2.25%. LAGVX is most appropriate for investors who want to diversify their portfolio with high-yield bonds with a focus on investment-grade bonds that have a credit quality rating of BBB.