Fixed income has become a very valuable part of a balanced portfolio in today’s economic climate, and it is no longer used simply to hedge an equities- or alternatives-heavy portfolio. Instead, fixed-income investments now come “with real income availability, which can very readily exceed future levels of inflation,” says Rick Rieder, chief investment officer of global fixed income at BlackRock.
Fixed-income funds also provide a reliably steady stream of income, which is helpful for investors who are using their portfolios to meet ongoing financial needs, says Jeff Johnson, head of U.S. fixed income product for Vanguard. He also points out that today, fixed-income funds can provide an attractive total return overall, particularly “for those invested in riskier sectors, such as high-yield corporates and emerging markets.”
However, with the growing importance of fixed income in investors’ portfolios, investors should “look to have an active fund manager over a passive strategy,” advises Paul Olmsted, senior analyst at Morningstar. That’s because in a relatively low-rate environment, “it’s difficult for investors to get the kinds of yields they got many years ago.”
With all this in mind, here are eight great fixed-income funds to buy now:
— Baird Aggregate Bond (BAGIX)
— Pimco Income (PIMIX)
— Vanguard Short-Term Investment-Grade (VFSUX)
— PGIM High Yield (PHYZX)
— Dodge & Cox Income (DODIX)
— FPA New Income (FPNIX)
— T. Rowe Price Floating Rate (PRFRX)
— BlackRock Strategic Income Opportunities Portfolio (BSIIX)
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Baird Aggregate Bond (BAGIX)
Performance for Baird Aggregate Bond is measured against the Bloomberg Aggregate U.S. Bond Index, and the fund’s stated goal is to beat that index’s annual performance. And since, according to Olmsted, “over 70% of the Aggregate Bond Index is U.S.-backed, it’s not hard to beat.”
However, Olmsted adds, BAGIX in particular has been a good long-term performer. Gabriel Denis, senior analyst at Morningstar, also considers the fund a “compelling candidate for the core bond investor.” This actively managed fund carries a five-star rating from Morningstar as well as its gold medal rating. Morningstar star ratings are based on a fund’s past performance, whereas medal ratings look toward future performance.
BAGIX has $35.1 billion in total assets under management, or AUM, and an expense ratio of 0.30%, which is below the average expense ratio of 0.50% to 1.00% among actively managed funds. In addition, the fund pays a 3.19% 30-day yield.
Pimco Income (PIMIX)
Another Morningstar five-star-rated, gold-medal fund, Pimco Income carries a slightly higher expense ratio than BAGIX, at 0.50%. Its benchmark index may be the same as BAGIX’s, the Bloomberg Aggregate U.S. Bond Index, but actively managed PIMIX invests primarily in income-generating bonds. With AUM of $117.7 billion, PIMIX pays a 4.13% 30-day yield. Olmsted thinks quite highly of this multisector fund as well. He says investors would be wise to remember that PIMIX is Pimco’s flagship fund, and that it has provided consistent income for investors over time.
However, PIMIX’s strategy “endured some pain” in early 2022, says Morningstar strategist Eric Jacobson, because it was carrying “between 2% and 3% in bond and currency exposures to Russia going into the year.” Jacobson also points out, though, that “this portfolio fared better than many multisector bond peers in the face of rising global bond yields.” In fact, he says, the fund’s strategy has posted longer-term returns that are among the category’s best, with modest volatility.
Vanguard Short-Term Investment-Grade (VFSUX)
Vanguard Short-Term Investment-Grade is a very popular fund, Johnson says. In fact, he adds that with AUM of $67.4 billion, not only is VFSUX one of Vanguard’s largest actively managed fixed-income funds, it’s also one of Vanguard’s oldest. Launched in October 1982, the fund will be celebrating its 40th birthday this year.
Elizabeth Foos, associate director at Morningstar, says this four-star-rated, bronze-medal fund offers “cost-effective exposure to short-term bonds.” However, Foos along with Elizabeth Templeton, associate analyst at Morningstar, also points out that VFSUX’s “bias toward corporate bonds saddles it with more credit risk than the typical short-term bond category peer.” They add that this credit risk, despite the fund’s strong long-term results, has brought VFSUX mixed returns during the past decade’s interest-rate changes and credit sell-offs.
VFSUX has an expense ratio of 0.10%, which Foos and Templeton say ranks the fund “in its Morningstar category’s cheapest quintile.” VFSUX currently pays a 3.91% 30-day yield.
PGIM High Yield (PHYZX)
PGIM High Yield is another really strong long-term performer, says Olmsted. He points out that PGIM “is actually part of Prudential and really kind of leans on those resources” and that the fund’s parent company “does a phenomenal job in high yield.” The parent company’s “most notable strength is a positive investment culture that has resulted in a strong lineup of funds, especially in fixed income and growth equity,” Jacobson reiterates.
As of July 15, PHYZX has earned more than a 7% annualized return over the last 20 years, performing “in the best decile of distinct funds” in its category from the time its longest-tenured manager, Robert Spano, signed on in October 2007, Jacobson says. Meanwhile, he adds, “its volatility was just shy of the median for its peers.”
PHYZX is an actively managed, Morningstar-rated four-star fund with a gold medal. The fund has total AUM of $19.6 billion and a 0.50% expense ratio, and it currently pays a 7.74% 30-day yield.
Dodge & Cox Income (DODIX)
>Olmsted points out that Dodge & Cox Income is considered by Morningstar to be a Core Plus strategy, meaning it has greater flexibility than other core offerings to hold investments in non-core sectors, such as corporate high yield, bank loan, emerging-markets debt, and non-U.S. currency exposures. Olmsted says this means the fund’s strategy is “a little riskier” than the more straight-ahead approach taken by BAGIX.
However, Sam Kulahan, analyst at Morningstar, notes that DODIX’s success is owing to its “relatively patient and, at times, contrarian approach to investing.” Kulahan says the fund’s managers tend to favor corporates, noting that the yield advantage offered by these securities is an important contributor to total returns over time. This five-star-rated, gold-medal fund pays a 2.42% 30-day yield, and it has grown investors’ wealth by more than 625% since its launch in 1989. The actively managed fund has AUM of $69.9 billion and a competitive expense ratio of 0.41%.
FPA New Income (FPNIX)
Until recently, FPA New Income has been closed to new investors. That’s why Olmsted says “this is one to get back into, since investors haven’t had a chance to do that in the past.” The fund closed to new investors in August 2020 and reopened on July 1, 2022. However, even with a new manager coming in to run FPNIX, Morningstar gives the fund an above-average rating for its leadership. Jacobson says investors are familiar with incoming manager Abhijeet Patwardhan, especially since he’s been comanaging the fund with FPNIX’s previous leader, Tom Atteberry, since 2015.
Jacobson says that the fund’s shareholder-friendly practices dovetail well with its risk-conscious strategy, which aims to gain at least 100 basis points on the consumer price index over five-year periods and positive returns over 12-month stretches. FPNIX has a four-star Morningstar rating as well as a bronze medal. This actively managed fund has AUM of $11.5 billion and an expense ratio of 0.45%, and it pays a 1.48% 30-day yield.
T. Rowe Price Floating Rate (PRFRX)
Investing about 80% of its assets in floating-rate loans and debt securities, T. Rowe Price Floating Rate follows a different strategy than most of the other funds included in this list. Floating-rate loans represent amounts borrowed by companies from banks and other lenders, often in connection with recapitalizations, acquisitions, leveraged buyouts and refinancings. Consequently, they often have a below-investment-grade credit rating.
Floating-rate loans are a unique asset class that’s taken hold over the past 10 years, Olmsted says. However, since these loans are “not investment-rate credit, they’re similar to high yield” bonds, he says, adding that investors might want to “be a little more conservative” in their strategy for these investments.
PRFRX’s consistent process is “dictated by careful, fundamental credit research,” he says, and conducted by an experienced analyst team. This has led the fund to outperform in a variety of market environments. PRFRX is a Morningstar four-star, gold-medal fund. However, at 0.76%, this actively managed fund’s expense ratio is higher than those of most of the other funds here. The fund has AUM of $5.4 billion and pays a 4.43% 30-day yield.
BlackRock Strategic Income Opportunities Portfolio (BSIIX)
BlackRock Strategic Income Opportunities Portfolio is another fund that has a slightly different strategy from other fixed-income offerings. BSIIX invests across the entire bond market rather than focusing on a specific sector, company type or geographic area. Because of its reduced limitations, it can remain nimble during changes in and credit conditions.
The fund’s non-traditional strategy requires trust in its managers, which Jacobson says is “well deserved.” BSIIX’s flexibility has helped it weather several periods of market stress, allowing the fund to outperform peers. BSIIX has a solid strategy and is a good complement to a fixed-income portfolio, Olmsted agrees. He calls the fund “a diversifier, a good add-on to that bigger bond piece.” The fund has an expense ratio of 0.62% and $42.4 billion in AUM. It pays a 3.55% 30-day yield.
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8 Great Fixed-Income Funds to Buy Now originally appeared on usnews.com
Update 07/18/22: This story was published at an earlier date and has been updated with new information.
