CERTAIN BOND FUNDS ACT LIKE STOCKS

For most investors, injecting bonds and bond funds is one way of earning income and lowering the overall volatility of their portfolios. But there are times such instruments can act like equity in some market conditions.

Lipper, a Thomson Reuters subsidiary, classified bond funds into different groups. Some act similar to bond funds most or all of the time. They can equate a stock portfolio. But over the last 10 years, various funds in three of these categories have rendered little or no divergence from the Standard & Poor’s 500 index.

Unconstrained, multi-sector, and flexible income categories include many funds investing throughout numerous debt instruments, including high-yield bonds, government bonds, and corporate bonds. More conservative investors avoid funds that do not provide stable income and steady performance. Some of these include:

• AllianceBernstein Unconstrained Bond Fund - An alternative to traditional fixed income, this bond fund invests across a wide range of global fixed-income sectors. When combined in the similar ratio as the Vanguard Total Bond Market ETF (BND) with the index, this combination posted a lower overall return more than seven years than the benchmark mix, having a relatively higher volatility.
• Free Market Fixed Income - Unlike its counterparts, this fund was able to post a negative correlation with SPDR S&P 500 exchange traded fund (SPY), but at the expense of lesser overall performance.
• Northeast Investors - The no-load mutual fund focuses on marketable securities of established firms which are said to give reasonable earnings. It incurred worse returns than the straight S&P 500 Index in 2008, and pairing it with the SPY did not help either. The flexible funds in the Lipper table generated returns of more than 35% in 2009, but away from the 6% return by BND for the same year.

Aside from the above-mentioned funds, convertible bond funds tend to move like stocks. The convertible bond’s value rises as the stock price climbs, disregarding other facets in the bond market. Although this can offer decent returns, it can give higher volatility in many cases.

A piece of advice: If you are after cutting overall portfolio volatility and smoothing out the movements from equity holdings, investing in bond and bond funds can provide more value for your money from traditional mainline income funds adhering to core debt sectors, such as investment-grade corporate debt.