Originally published Sunday, September 24, 2006 at 12:00 AM
Returns key to success of ultra-short bond funds
Ultra-short bond funds are finally getting the recognition they deserve. These are funds that usually provide you with a higher return than...
(Morris County, N.J.) Daily Record
Ultra-short bond funds are finally getting the recognition they deserve.
These are funds that usually provide you with a higher return than money-market funds and short-term CDs, but with a bit more volatility. And lately they have been attracting lots of money.
One of the leading ultra-short funds is Schwab YieldPlus (SWYPX for Investor shares, SWYSX for Select shares), with a startling $8.1 billion in assets.
It's no-load, of course, with a $2,500 minimum for Investor shares and $50,000 for Select shares.
Until recently, the Investor fund was rated tops by Morningstar, but it recently dropped to four stars, although Kimon Daifotis, the lead manager, thinks Morningstar is including in the ultra-short category some funds that don't qualify — funds that belong in the short-term and intermediate-term category. (The Select share class still gets five stars.)
According to Lipper, Schwab YieldPlus is No. 1 for one year and for five years, and No. 2 for three years. Annualized total return over five years: a little above 3.1 percent.
Morningstar recommends Fidelity Ultra-Short and Payden Limited Maturity — although it rates the Payden fund just average, and neither fund has done as well as the Schwab fund.
Apparently the Schwab fund isn't recommended because of its supposedly greater riskiness.
An ultra-short fund own bonds whose average maturity is above that of money-market funds. ("Maturity" means when the bonds are due to be paid.) And unlike money-market funds, which almost always must keep their price per share at $1, the net asset value of an ultra-short bond fund fluctuates a little. So there's a trade-off.
Daifotis suggests that investors who won't need their money for at least a year consider an ultra-short-term fund rather than a money-market fund.
These funds have become so popular of late because they pay more than money-market funds at a time yields in general are skimpy and because their fluctuations usually aren't very wide.
So, why has the Schwab fund done so well?
Lots of research. The fund has 12 to 14 analysts scouring the world for bargains, and they occasionally come up with little-known but valuable debt instruments — such as bonds issued by John Q. Hammons, Yellow Roadway, and Delek & Avner.
"We don't have one analyst covering 300 bonds," said Daifotis. "Our analysts may cover only 100."
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