In Bond-Funds, Gems Are Solid, Not Stellar

Steadiness, not pizazz, tells the story of a good bond fund.

A bond fund will seldom have the verve of a stock fund. Nor will it "outrun a stock fund over a long period of time," says Stephen Kane, who co-manages two new bond funds based in Los Angeles. But a bond fund provides instant diversification and a hedge against a bear market in equities, he says.

With analysts talking about a bear market in the year ahead, a good bond fund may not be a bad idea.

Mr. Kane's funds are hidden gems, says Mark Wright, an analyst at Morningstar in Chicago. Metropolitan West's Total Return and Low Duration Bond funds (800-241-4671; minimum investment: $5,000, or $1,000 in an individual retirement account) were launched April 1.

Through Aug. 31, Total Return earned 6.38 percent, beating the benchmark Lehman Aggregate Bond Index at 5.6 percent for the past five months. Meantime, Low Duration returned 3.97 percent through Aug. 31, which beats the benchmark Merrill Lynch Treasury Index of one to three years at 3.42 percent.

Kane and his co-managers like Treasury and US government agency issues, as well as mortgaged-backed securities and a few corporate bonds. He is leaning short rather than long, with an average time-duration of around 4.3 years for instruments in the total return fund, and one to three years for the low duration fund. Because the economy has room to grow, additional interest rate hikes by the Federal Reserve - either later this year or next year - seem likely, he says.