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3 Bond Funds to Watch

These three bond funds added to Morningstar Prospects may someday come under full coverage.

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Morningstar Prospects is a list of up-and-coming or under-the-radar investment strategies that Morningstar Manager Research may someday bring under full coverage. We recently added a trio of new bond funds to the list.

American Funds Strategic Bond (ANBAX) adopts an approach that majors in rates and minors in credit, which sets it apart from more credit-heavy peers in the intermediate core-plus Morningstar Category. The fund aims to derive 60% of excess returns from duration and yield-curve positioning, with the remainder coming from sector and security selection. As such, the strategy’s duration, a measure of interest-rate sensitivity, can whip around and has been as much as four years longer or shorter than its benchmark over the past two years. The managers aim to limit the strategy’s correlation to equities and typically tilt the portfolio toward the most liquid sectors of the bond markets, such as government debt and investment-grade corporate credit. Execution of this rates-focused approach has been strong. The strategy has often outperformed in both credit and rates stress periods, including during 2020’s first-quarter coronavirus sell-off.

BlackRock Income (BMSIX) is a notable proposition within the multisector bond Morningstar Category. This offering’s flexible approach leverages the same resources and philosophy that back Gold-rated BlackRock High Yield Bond (BRHYX). Management aims to achieve consistent and attractive risk-adjusted results throughout the credit cycle by dynamically investing across global credit markets. The investment universe is relatively broad, ranging from collateralized loan obligations and other securitized assets, to investment-grade and high-yield corporates, emerging markets, and bank loans. The fund has delivered strong returns, ranking ahead of 85% of its peers, with a lower volatility than 60% of them.

FlexShares High Yield Value Scored Bond (HYGV) index fund is a solid pick for high-yield bond market exposure. It tracks the Northern Trust High Yield Value-Scored U.S. Corporate Bond Index, which seeks to maximize exposure to bonds offering higher yields while controlling for downside risk. The fund’s benchmark picks bonds from the Northern Trust High Yield U.S. Corporate Bond Index, a broadly diversified, market-value-weighted index that is representative of the available market. It employs an optimizer to maximize exposure to bonds with high value scores, a proprietary metric that assesses each eligible bonds’ relative value. The optimizer uses various constraints to keep the fund’s risk in check. This fund benefits from a systematic approach that ensures a broadly diversified portfolio with minimal concentration risk. For example, as of June 2021, the top 10 holdings in the fund’s portfolio accounted for 5% of assets, while the high-yield bond Morningstar Category average was 15%.

Analysts Nicholas Goralka, Sam Kulahan, Benjamin Joseph, and Neal Kosciulek provided the research behind this segment.

Morningstar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.