As S&P Global Market Intelligence has repeatedly noted the benefits for passive against the average active mutual fund include stronger historical performance and lower costs. But investors favoring active management can try to have their cake and eat it too, if they do their homework.
In 2009, the average fund in the S&P Global Market Intelligence taxable bond fund category generated 19.7%, a return more typical of what investors have hoped for from a riskier equity fund. In the subsequent three years, the average bond fund rose between 4.6% (in 2011) and 8.5% (2010), quite respectable for strategies where capital preservation is a focus. However, in the three calendar years since, the average fund lost money twice (2013 and 2015) and gained 3.0% (2014) less than in the recent past. In contrast, iShares Core Aggregate Bond (AGG) outperformed the average bond mutual fund in three of the last five calendar years. Of course, past performance is not indicative of future results.
Looking forward, Jeffrey Gundlach, CEO of DoubleLine Capital, said last week at New York investor event, "We are in a low return environment." Gundlach, who manages many of the firm's bond portfolios - including DoubleLine Core Fixed Income (DBLFX), which garners a five-star ranking from S&P Global's proprietary holdings-based fund ranking methodology - added, "Investors need to be a capital preservation mindset."If investors buy in to that forecast but don't want to just track the Barclays Aggregate bond index for a modest 8 basis points, as AGG does, they would be wise to pay less than the 79 basis points the average core bond mutual fund charges. The 70 basis point differential will more noticeable when returns are modest.
Putting performance and costs together, there are 24 non-institutional class core bond mutual funds in our database with a three-year total return in the top quartile and with a below-average expense ratio. Three quarters (18) of them are ranked either five- or four star by S&P Global Market Intelligence, which should not be a surprise given that these two metrics are significant drivers of the ranking along with credit quality, 30-day SEC yield, and standard deviation.
Dodge & Cox Income Fund (DODIX), Fidelity Total Return Bond (FTBFX), and Vanguard Intermediate-Term Investment-Grade (VFIDX) are all worthy of consideration.
We encourage clients to use the Mutual Fund screener on MarketScope Advisor to see other four or five-star ranked funds that fit the S&P Global Market Intelligence strong performer/low-cost criteria in the core bond fund and other peer groups such as high yield and short term Treasuries. Because if you own a weak performing, and expensive, actively managed bond fund, you can find better alternatives.
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