The last decade includes the financial crisis of 2007-2009, with the peak being the second half of 2008. It seems implausible that there are funds that delivered positive returns in that environment, as well as during the bull market over the past six years. If you’re looking at total return on annual basis, the funds below manage to deliver in every environment over the past decade, but how much of a return? And most importantly for long-term investors, what has been the cumulative return for these funds since their inception dates? That should give you a better idea of what kind of opportunities, or lack of, might lie ahead. Due to current economic conditions that have the potential to worsen in 2016, it might be prudent to stick to funds that have the majority of their exposure to investment-grade bonds.
High Quality, Low Return
If you’re looking for exposure to investment-grade bonds, then consider Great-West Short Duration Bond (MXSDX), which invests at least 80% of its net assets in U.S. Treasuries, commercial and residential mortgage-backed securities, asset-backed securities and corporate bonds. MXSDX has depreciated 0.10% since Aug. 1, 1995, but investors are here for capital preservation, not capital appreciation. MXSDX yields 1.17%. The expense ratio of 0.60% is lower than the category average of 0.81% and there is no minimum investment. These aren’t exemplary numbers, but the objective is to stay safe during volatile times while picking up a little yield. (For more, see: Top 4 Investment Grade Corporate Bonds ETFs.)
The Western Asset Mortgage Backed Securities Fund (HGVSX) launched on March 20, 1984. Since that time, it has appreciated 8.79%. It currently yields 2.70%. The fund’s strategy is to invest at least 80% of its net assets in mortgage-backed securities and 72.96% of its bond holdings are rated AAA, which should allow investors some peace of mind. The bad news is that HGVSX comes with an expense ratio of 1.78% versus a category average of 0.82%. The minimum investment is $1,000.
Bigger Investment, Not Better Results
Prudential Short-Term Corporate Bond (PBSMX) focuses on high current income with capital preservation by investing in bonds of corporations with varying maturities. The effective duration of the fund is generally less than three years. PBSMX has depreciated 4.31% since its inception date of Sept. 1, 1989. It currently yields 1.19%. The expense ratio of 0.78% is slightly better than the category average of 0.81%. This is a large fund relative to the others on this list, with net assets of $8.99 billion. The minimum investment is $2,500. Is it worth the price? You can make an argument either way, but there are better opportunities available. (For more, see: Top 5 Corporate Bond Mutual Funds.)
No Expense Ratio
BlackRock Allocation Target Shares Series S Portfolio (BRASX) does not come with an expense ratio, which is impressive considering the category average is 0.85%. However, the performance of the fund and its future potential are more important. Since the fund’s inception on Oct. 1, 2014, it has depreciated 3.02%, but it currently yields 2.98%. Another potential positive is that there is no minimum investment. But what is the future likely to hold for BRASX? BRASX invests in:
- Commercial and residential mortgage-backed securities
- Obligations of non-U.S. governments and supra-national organizations
- Obligations of domestic and non-U.S. corporations
- Asset-backed securities
- Collateralized mortgage obligations
- U.S. Treasury and agency securities
- Cash equivalent investments
- Repurchase agreements
- Reverse repurchase agreements
- Dollar rolls
That would qualify as a broad array of investment vehicles. As far as potential goes expect more of the same, which is low capital appreciation – if any – a decent yield, and relative resiliency to bear market environments. (For more, see: Play the Bear Market with Top Bear Market Funds.)
The Bottom Line
If you’re looking for relative resiliency to challenging economic conditions while picking up a little yield, then you might want to consider further researching the funds above. You should not expect a big return. This is more about capital preservation. (For more, see: Do Bear Market Funds Make Sense for Investors?)
Dan Moskowitz does not have any association with any of the funds listed above.