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Find a great bond fund
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October 8, 2001: 7:00 a.m. ET
Sick of watching your stocks fall? Try a top-notch bond fund.
By Staff Writer Ilana Polyak
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NEW YORK (CNNmoney) - After months of watching your stocks fall, you may be ready to buy a top-notch bond fund.
Admit it: You used to think that bonds were hopelessly dull, the investment equivalent of driving 40 mph on the autobahn. But after months of watching your stocks getting beaten up, maybe you've seen the light, recognizing that bonds belong in your portfolio, after all.
The attraction is simple: Bonds don't move in tandem with stocks, so they reduce the overall riskiness of your portfolio. In the past 12 months, for example, the average bond fund rose 6.7 percent, while the typical stock fund sank 9 percent.
Even aggressive investors should consider stashing 15 percent or so of their assets in bonds. If you're older and more conservative, you may want to go as high as 70 percent. So what should you buy with that money? There are myriad choices, from super-safe Treasuries to high-risk junk. If you're shopping for Treasuries, buy directly from the government (www.publicdebt.treas.gov). For other types of bonds, consider the funds below.
Core bond funds
The grand master of bond investing is Pimco's Bill Gross, who has an uncanny gift for playing big economic trends. His flagship fund, PIMCO Total Return, carries a 4.5 percent load, so we'd favor his two no-load funds: Fremont Bond and Harbor Bond. Gross, who manages about $220 billion in assets, has recently been betting that Alan Greenspan will continue to slash interest rates. This year, Fremont is up 6.4 percent, and Harbor is up 5.5 percent.
Another compelling option is Vanguard Total Bond Market Index, which owns a basket of about 1,400 bonds in the Lehman Bros. aggregate index. With annual expenses of just 0.22 percent, this fund has a major advantage against most actively managed rivals. (By comparison, Harbor Bond has an expense ratio of 0.6 percent.) In 2001, this Vanguard fund has risen 6.4 percent, beating 80 percent of its peers.
Muni funds
If you're in a high tax bracket and live in a heavily taxed state like California or New York, consider a municipal bond fund for your taxable account. You won't pay federal or state taxes on the income from munis if you buy bonds of the state where you reside.
The returns of muni funds tend to be fairly modest, though, so it's crucial to keep expenses down. That's one reason why we'd recommend low-cost Vanguard Long-Term Tax-Exempt Bond. It's also performed well while taking less risk than its peers.
High-yield funds
Junk bonds offer lofty yields to compensate for the heightened risk of defaults. This makes junk both alluring and dangerous-an investment to use only sparingly.
Margaret Patel of Pioneer High Yield has proved particularly adept at navigating the sector's minefields. Lately, she has avoided the debt of troubled telecommunications firms, sticking instead with bonds of companies in areas like health care and energy. About two-thirds of her portfolio is invested in high-yielding convertibles, bonds that convert into common stock if the price hits a certain level. The fund has climbed 12.6 percent in 2001, and it looks headed for a fourth straight year as the country's No. 1 junk bond fund.
Another fine option: Northeast Investors Trust, run by Ernest Monrad -- since 1960 -- and his son Bruce. They have achieved strong returns by finding offbeat bargains in areas like emerging markets debt. The fund is up 5.8 percent in 2001. 
* Disclaimer
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