3 Bond Fund Picks for Retirees
These funds can generate income and provide ballast against stock market swings in retiree portfolios.
Susan Dziubinski: I'm Susan Dziubinski for Morningstar.com. Bond funds can serve many purposes in the portfolios of retirees. For one, they throw off much needed income. They also can provide some ballast against stock market swings. Morningstar director of personal finance Christine Benz includes a handful of bond funds in her model portfolios for retirees. Here are some of them.
Emory Zink: Portfolio managers Rob Galusza and Julian Potenza benefit from the breadth and depth of resources as they allocate to a mix of Treasuries, agencies, and high-quality corporate credit in Fidelity Short-Term Bond. The firm's robust teams of securitized and corporate credit analysts as well as quantitative risk tools complement the portfolio managers' shrewd analysis of their opportunity set, which often includes careful attention paid to overnight rates, repo rates, and money market funds. The fund tends to tilt higher credit quality than its typical peer, and it also tends to have shorter duration given that it tracks its Bloomberg Barclays 1-3 Year Government Credit Index rather closely. What this means is that in periods of risk-on fervor, the fund will probably lag peers that take greater latitude in terms of duration, credit quality, and out of benchmark fare. But when markets turn rocky, this particular fund should outperform that same group, and this should contribute to stronger risk-adjusted returns over time.
Sarah Bush: Gold-rated Loomis Sayles Bond has a number of strengths. These start with its investment team which is anchored by bond fund legend Dan Fuss. Dan Fuss works here with managers Elaine Stokes, Matt Eagan, and Brian Kennedy. Loomis has one of the largest credit research teams in the business. This is really important given the fund's willingness to take on significant credit and currency risk. They will also venture into troubled parts of the bond market when the managers think investors are getting well-compensated for that risk. Recently though, the team has been pretty cautious, which also illustrates the strength of the fund. It has a value-oriented philosophy to bond investing. This approach has generated top-notch returns over the long haul, but you have seen significant losses when credit and non-U.S. dollar currencies run into trouble. Those who have been willing to weather its ups and downs have been well-rewarded, but it's really best for holding with the relatively long time horizon.
Phillip Yoo: Vanguard Short-Term TIPS Index Fund is a strong option for investors looking for protection from unexpected inflation risk. Because of the fund's short duration, not only does it have low interest-rate risk but also it provides high correlation with the changes in the Consumer Price Index. Because TIPS are offered by the U.S. government, this fund has nearly zero credit risk. The fund tracks the Bloomberg Barclays TIPS 0-5 Year Index, and this fund benefits from Vanguard's indexing expertise. Over the last three years, the fund returned about 1% per year, and this is mainly due to the investors' low expectation for future inflation. This return pattern demonstrates that given the fund's very low fee of 6 basis points, this vehicle is suitable for buy and hold long-term strategy.
Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.