September 24, 2013

Interest rates rose all summer long sending bonds into a tailspin, but investors still need bonds in their portfolios .  How can investors manage their fixed income portfolios in a rising interest-rate environment?  NoLoad FundX can help.

A Variety of Bond Funds to Choose From

NoLoad FundX covers a wide variety of bond funds, including funds that aren’t as sharply affected by rising rates. like short-term bond funds and high-yield funds. We group bond funds by credit risk and interest rate risk, the two essential kinds of risk affecting bonds and bond funds, which allows investors to make intelligent comparisons between funds.

We also separate corporate bond funds from government bond funds. This gives investors another way to manage interest-rate risk because in the current market, government bonds have been more severely impacted by rising rates. Corporate bonds pay a higher interest rates (or “coupon”) so these bonds  are repaid quicker than government bonds, which pay a lower interest rate.

Easy to Spot Low-Duration Funds

A fund’s duration is an indication of how sensitive a bond fund is to interest-rate fluctuations so fixed-income investors should be paying attention to the duration of their bond funds. In NoLoad FundX, we list the duration of a bond fund in the the Portfolio Description column. For example, TCW Total Return Bond (TGMNX), an intermediate-term corporate bond fund, has duration of 3.28 years. This implies that if interest rates rose 1%, TGMNX could lose around 3%.

We group funds by duration, separating short-term funds from intermediate- and long-term funds, to make it easy for investors to find bond funds that have a lower duration – and thus lower interest rate risk.

A Strategy that Manages the Risk of Rising Rates

Focusing solely on duration, however, may not produce the best returns. For the 12-months ending August 31, 2013, for example, short-term corporate bond funds, which have lower interest-rate risk, succeeded in avoiding the losses that most intermediate-term and long-term funds experienced. But they also didn’t participate in the gains of high-yield bond funds or strategic bond funds.

NoLoad FundX’s Flexible Income strategy is designed to manage interest rate risk and also to generate consistent returns over time.  NoLoad FundX subscribers can follow this strategy through the Monthly Flexible Income Portfolio, or MFIP .

This year investors who followed the MFIP were led to shorten maturities (therefore lowering their interest-rate risk) and also to use higher-yielding corporate bonds rather than Treasuries or mortgage-backed securities (thereby keeping lower duration and less interest-rate risk). Because of these changes, investors who followed the MFIP avoided most of the volatility experienced by bond investors in recent months and stayed ahead of the Barclays Aggregate Bond index as well.