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Value Line’s Diversified Bond objective group consists of funds that invest in a mix of corporate and government fixed-income securities in pursuit of current income. The definition is broad by design, as it is meant to include bond funds that, effectively, can go anywhere in the fixed-income space.

As bond funds, the offerings in this category must invest the majority of their assets in fixed-income products. After that requirement, the sky is the limit on what the managers here invest in. Thus, the funds in this category span a broad spectrum from the likes of the religiously driven Ave Maria Bond Fund (AVEFX) to the more traditional Fidelity Total Bond Fund (FTBFX).

The objective includes funds with focuses across the duration spectrum, which allows investors to manage their exposure to interest-rate fluctuations if they so choose. These include so-called ultrashort funds, such as AMF Ultra Short Fund (AULTX), that focus on bonds with durations slightly greater than securities that might reside in a money market fund. The duration focus then moves out to short-term bond funds, like Hartford Short Duration A (HSDAX), followed by intermediate bond funds, such as USAA Intermediate-Term Bond Fund (USIBX), that invest in fixed-income securities that are between short-term bond funds and the type of debt that a long-term bond fund, such as Vanguard Long-Term Bond Index Fund (VBLTX), would own. The latter category of funds is far less common, since many funds in this group are meant to be core fixed-income holdings, such as JPMorgan Core Bond Fund A (PGBOX), which can act as an investor’s sole bond holding with exposure to multiple bond categories and, usually, bonds across the duration spectrum. 

The group even contains funds with a focus on reducing taxation, such as PIMCO Unconstrained Tax Managed Bond A (ATMAX). Of course, there are index offerings within the group, like T. Rowe Price US Bond Index Fund (PBDIX) and Vanguard Total Bond Market Index Fund (VBTLX). 

The Diversified Bond objective group has been a below-average performer relative to the broader bond market over the long term, as measured by the Barclays Aggregate Bond Index. For the 10-year period ended May 31, 2013, the group had an annualized return of 4.0%, while the Index reported an annualized return of 4.6%. For five years and three years, the group had gains of 5.0% and 5.3%, respectively, while the Index reported gains of 5.3% and 4.6%, respectively. Over the trailing 12-month period through May 31, 2013, the Diversified Bond group reported a return of 4.8%, compared with 0.9% for the Barclays Aggregate Bond Index. The group has an average Risk Rank of 3, indicating that funds in this group might appeal to many investors looking to limit risk. That said, investors with a long investment horizon might also want to invest in common equities, a group more likely to outpace inflation. 

Fund Name: Frost Diversified Strategies Fund A
Ticker:FDSFX
Investment Advisor: Frost Investment Advisors, LLC
Year-to-Date Return: 7.00%
Benchmark: CBOE Buy/Write Index/HFRI Fund of Funds Composite Index/BofA Merrill Lynch US 3-Month Treasury Bill Index
Objective: The Fund seeks capital growth with low correlation to the stock and bond markets.
Investment Strategy:
• Has a traditional allocation strategy providing exposure to the stock and bond markets. This involves exposure (primarily thorough exchange-traded products (ETPs)) to stocks of domestic and foreign companies of any size, and fixed income obligations issued by US and foreign governments and corporations.
• Has exposure to investment strategies such as currencies, commodities and derivatives.
• Gains exposure to both allocations primarily through investment in exchange-traded products (ETPs), which include exchange-traded funds and exchange-traded notes.
• May invest in real estate investment trusts, master limited partnerships, business development companies and index-related commodity securities.

Fund Name: Thrivent Diversified Income Plus Fund A
Ticker:AAHYX
Investment Advisor: Thrivent Asset Management, LLC
Year-to-Date Return: 6.68%
Benchmark: S&P 500 Index and Barclays US Corporate High Yield Bond Index/Barclays US Corporate Investment Grade Index/S&P 500 Dividend Aristocrats Index/Barclays US Aggregate Bond Index
Objective: The Fund seeks to maximize income while maintain prospects for capital appreciation.
Investment Strategy:
• Invests in a diversified portfolio of income-producing debt and equity securities.
• May invest in any maturity or credit quality, including high yield, high risk bonds, notes, debentures and other debt obligations commonly known as “junk bonds”.
• May also invest in mortgage-backed securities (including commercially backed ones) and asset-backed securities.
• Uses fundamental, quantitative, and technical investment research techniques to determine what securities to buy and sell.

Fund Name: Putnam Diversified Income Fund A
Ticker: PDINX
Investment Advisor: Putnam Investment Management, LLC
Year-to-Date Return: 4.34%
Benchmark: Barclays US Aggregate Bond Index
Objective: The Fund seeks as high a level of current income as management believes is consistent with preservation of capital.
Investment Strategy:
• Invest mainly in bonds that are securitized debt instruments (such as mortgage–backed investments) and other obligations of companies and governments worldwide.
• May consider, among other factors, credit, interest rate, and prepayment risks, as well as general market conditions, when deciding whether to buy or sell investments.
• Typically uses derivatives, such as futures, options, certain foreign currency transactions and swap contracts, for both hedging and non-hedging purposes.

In the table below, we have listed 10 top-performing funds through May 31, 2013 from our Fund Advisor database.

 

10 Top Diversified Bond Funds Performance 

 

Fund Name 

Ticker 

% Year-to-date 

Total Return 

% 1-Month 

Total 

Return 

% 3- 

Month 

Total 

Return 

% 6-Month 

Total  

Return 

% 5-Year 

Total 

Return 

Annualized 

Toreador Core Fund Retail 

TORLX 

19.43 

5.82 

12.85 

26.68 

5.13 

  

  

American First Income Trends A 

AFPAX 

8.84 

-0.17 

2.84 

10.02 

  

Frost Diversified Strategies A 

FDSFX 

7.00 

0.40 

3.65 

7.68 

  

Thrivent Diversified Income Plus A 

AAHYX 

6.68 

0.00 

3.29 

7.76 

7.48 

Nuveen Preferred Securities Fund A 

NPSAX 

5.76 

0.54 

2.95 

7.37 

10.17 

Wells Fargo Adv Diversified Income Blder A 

EKSAX 

5.59 

-1.07 

2.48 

7.24 

5.48 

PIMCO Income Fund A 

PONAX 

5.21 

0.41 

2.76 

6.98 

12.22 

Putnam Diversified Income Fund A 

PDINX 

4.34 

0.60 

1.66 

6.21 

5.74 

Thornburg Strategic Income A 

TSIAX 

3.62 

-0.84 

1.58 

4.39 

7.06 

PIMCO Diversified Income Fund A 

PDVAX 

3.05 

0.36 

2.49 

3.72 

9.26 

Diversified Bond Objective Group 

  

0.37 

-1.25 

-0.03 

  

0.61 

4.96 

  

At the time of this article's writing, the authors did not have positions in any of the funds mentioned.