Finding Shelter From the Storm

Stock mutual funds were all wet in 2008. Here’s where to invest now to avoid getting soaked.

Going forward, bonds may offer stocklike appreciation. In fact, bond funds that took losses in 2008 could rebound in 2009 if credit markets return to normal. In that case, bonds might deliver capital gains in addition to yields ranging from 4% (from tax-exempt municipal bond funds) to 11% (from funds holding high-risk corporate “junk” bonds).
Which types of bond funds are likely to offer both safety and upside potential?

Treasury bond funds. Last year’s big winners, Treasuries remain safe harbors because they won’t default: Uncle Sam can just print more money to repay bondholders. Nevertheless, Treasury bond funds may be “overstretched” now, says Lawrence Jones, Morningstar’s associate director of fund analysis. “Although the flight to quality could continue, which would help Treasury bond funds, other types of bond funds look like they offer better value,” he says. “Treasury bonds may be the most overvalued asset class now.” The Rydex Government Long Bond 1.2x Strategy Investment Fund (RYGBX) and the ProFunds U.S. Government Plus Investor Fund (GVPIX) were two big performers in the category last year, with total returns of 50% and 49.6%, respectively.
Nimble bond funds.  Jones suggests that investors seeking relative safety in the bond market choose a fund that’s run by a savvy manager who can move among various types of bonds to find those that are most appealing. Those might include investment-grade corporate bonds, “junk” corporate bonds, Treasury bonds, and mortgage-backed securities.

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  • Searching for the $4 stock or less as advertised in the June 2005 mag. Thanks