The Purpose Of Bond Funds - Total Return Or An Equity Hedge

BondInvestor

We tend to look at mutual funds through the window of total return (less sophisticated people - not on this forum sometimes look at yield). However, a fund that has a high total return, lets say a high yield or emerging market bond fund will tend to have high volatility and correlation with US equity prices. In other words, they don't provide the same benefits as a good old fashioned core bond fund. If the stock market tanks again, you'll be happy is part of your portfolio is in a core bond funds.

Here is a link to Learn Bonds' Favorite core bond funds: http://www.learnbonds.com/5-bond-funds-that-everyone-should-consider/

fundalarm

i have to admit, this cute intro thingy is better than many in popular press. if you want to refine your case, then you should suggest owning high total return bonds out of investor's EQUITY risk budget (i.e. sell 5% S&P500 and buy hi yield bond fund for a similar returns but better risk profile). to have bonds act as a true hedge in your portolio (move in the opposite direction from equities in a day like today), it might be ok to be in AGG, but it is even better to be in TLT or any other vehicle investing in Long Term Treasury. Forget the yield on that thing -- this investment will make money when the hell breaks loose.

hank

Total Return or Equity Hedge? A question worth asking - a sophisticated one many may fail to consider. Answer is both of the above: (1) Bonds (or bond funds) that generate reliable dividends add stability to a portfolio. There's a trade-off there of course. In return for that stability you give up the likely higher returns of stocks over the very long run. (2) Longer dated high quality bonds (or bond funds) offer a hedge against volatility in equities to the extent that they move inversely. . However, at current historically low yields, they are a dangerous place to be. For that reason, I prefer to do my own hedging with cash or short term bonds. However, own some fine hybrid funds where the manager uses longer bonds as a hedge. No problem if done skillfully - but I wouldn't play with them on my own at these abysmal rates.

MaxBialystock

Both of the above, as you say. Took the words out of my mouth...Hank, your response in its entirety makes a great deal of sense to me. I have a domestic balanced fund which I'm very happy with: MAPOX, at just 3.21% of my total. I have been using PREMX for its very satisfying returns over time as well as the monthly dividends. I'm still overweight there. Lately, it has been on a tear. I am always telling myself I need to grow the proportion of my stuff which is in ostensibly safe, mundane, conservative domestic bonds. I'm using DLFNX for that, but I chose it because it's not QUITE what it's advertised to be. It's not, for example, the same sort of common-garden domestic bond fund that DODIX is. My MACSX and MAINX (6.4% of total portfolio combined) give me Asian convertibles, sovereigns and corporates. For the moment, I suppose we'd all do well not to own much in the way of zero-interest USA sovereign debt!