Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.ibd From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: \TITLE Date: Mon, 26 Oct 92 13:29:30 EST Message-ID: <6.1992Oct26.132931@AmeriCast.com> TITLE #m#gmrama#m#Blending Bonds Helps Funds Reduce Risk Bernice Napach In New York Bond investors who live by the maxim to never, never put all their eggs into one basket should consid- er a fairly new type of bond fund that spreads dollars among dif- ferent sectors to minimize risk. These strategic multisector income bonds invest in three major areas -U.S. government bonds, foreign bonds and high-yield cor- porate bonds - on the assumption that each sector has its own in- herent risk that can partially neutralize the risks of the oth- ers. The money usually can be moved around from one sector to another with ease. The goal: high yield with limited volatility. "One sector hedges another," said Rosemary Thomsen, a portfolio manager at the Putnam Cos., home of the Putnam Diversified Income Fund. For example, if the bull market in bonds finally ends be- cause of rising U.S. interest rates, Treasuries will lose value but overseas bonds could become investment opportunities. High- yield bonds here might just clunk along, which is all they have to do, Thomsen explained. High-yield corporates, or junk bonds, whose credit ratings are below investment grade, face the risk of further credit downgrades and defaults -problems that usually be- come more acute in a weak economy. But a sluggish economy is fodder for a Treasury bond rally. The risks faced by foreign bonds are twofold - interest rate changes overseas and currency moves, because, ultimately, those foreign holdings are converted back into U.S. dollars. The risks, of course, vary in different regions of the world and in dif- ferent countries. The advantages of multisector income funds, says Don Phillips, publisher of Morningstar Inc.'s Five-Star Investor newsletter, are that they "smooth out the ride" one takes when investing in different market sectors and they "make higher-risk investments (like junk bonds and foreign bonds) more accessible." Multisector funds appear to be less volatile than single- sector funds. But the jury is still out on whether they Blending Bonds Helps Funds Reduce Risk outperform single-sector funds because the multisector funds haven't been around for more than a few years. The granddaddy of them all is the MFS Multimarket Income Trust, a closed-end fund that debuted in March 1987. Since then, Oppenheimer introduced the Oppenheimer Strategic Income Fund in October 1989, the first open-ended fund of its kind. There are currently about 30 different multisector funds, includ- ing closed- end funds, whose shares can be purchased on the stock exchanges where they trade, and open-end funds, bought directly from the sponsor or through a broker. Average Returns As a group, open-end multisector funds earned an average total return of 8.39% from Jan. 1 through Sept. 30 and 13.85% for the 12 months ended Sept. 30, according to Morningstar Inc., which is based in Chicago. Closed-end multisector funds did even better, rising 9.58% from Jan. 1 through Sept. 30 and 15.55% for the year ended Sept. 30. Both types of multisector funds outperformed international bond funds and Treasury bond funds during the same periods but lagged high-yield funds. Open-end junk bond funds rose 15.88% year to date through Sept. 30 and gained 21.59% for the 12 months ended Sept. 30. Open-end international funds ad- vanced 4.51% and 10.96% and Treasury bond funds gained 6.14% and 12.38% for the same two periods, respectively. In the closed-end market, the comparable figures are 18.91% and 24.45% for high- yield corporates, -1.54%#m#cq#m# and 5.23% for international bond funds and 7.10% and 12.96% for government bond funds. Multisec- tor bond funds are "for the investor who wants diversification and a more stable NAV (net asset value)," said James Swanson, senior vice president at MFS in Boston. "For the last two years, they underperformed junk bonds. But over the long-run, they will tend to outperform single purpose funds." And they will tend to be less risky, according to fund sponsors, though the funds are not devoid of risk. "Multisector bond funds are not a great place for people who want a secure parking place for their money like CDs," said Phillips at Morningstar. "Rather, they are a good place to tone down the risk of a junk bond fund or an interna- tional bond fund. "They are a way of getting more specialized bonds in a portfolio with less risk of doing so," he continued. "They are for investors who can tolerate a little volatility for greater returns." Most of the multisector funds have a theoretical target of appor- tioning one-third of their assets among each of the three major sectors - government bonds, junk bonds and international bonds. Some have minimum investments in each category. Some do not. And some, like the MFS Income Opportunity Trust, have a small invest- ment in stocks. Each fund has its own investment outlook, which will determine how its assets are invested - how much in each category and the average maturities of the bonds in each sector, as well as other factors. At MFS, the high-yield component of the Income Opportunity Trust, for example, has been cut to about 20% of assets on the view that there are few opportunities left in that sector. The John Hancock Strategic Income Fund is gradually reducing its 48% stake in high-yield bonds and moving some of those funds to the international sector, said portfolio manager Frederick Ca- vanaugh. Oppenheimer actually opened two new multisector funds in August - the Oppenheimer Strategic Investment Grade Bond Fund, which restricts its corporate holdings to investment grade bonds, and the Oppenheimer Strategic Short-Term Income Fund, which lim- its its U.S. bond sector to the short term. The former was designed to appease investors who were scorched by the junk bond meltdown in 1990; the latter is for investors scarred by the rout in enhanced government bond funds in the late 1980s, according to Art Steinmetz, portfolio manager. Funds Underperformed Paradoxically, both funds this year underperformed the company's Strategic Income Fund, which does not have similar restrictions on its holdings. Open-end multisector bond funds have minimum investments, usually ranging from $1,000 to $2,500 though the minimums can be less for retirement accounts. Open-end funds with loads charge around 4.5% to 4.75% for investments below $50,000 or $100,000, and lower loads for above those levels. Expense ra- tios for both open-end and closed-end multisector funds average around 1.5%. Catherine Gillis, editor of the Morningstar Closed End Fund newsletter, said the 1.5% expense ratio may be too high although the idea of the multisector funds is a good one. "Don't overpay for prudence," she advised. This article is copyright 1992 Investors Business Daily. Redis- tribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM