Where is the sex in bond funds?

By Dian Vujovich

I don’t write much about bonds. That’s not because I don’t think they make wise and smart investments—fixed-income always has a place in one’s portfolio. But the real reason behind my sidestepping them is because the stock market has just been a lot sexier than the bond market ever since the market’s crash in 2009. And sex, as they say, sells.

Sticking with that stocks-are-sexy kind of thinking—which ultimately leads to the notion that sex translates into intrigue and a worth-the-risk kind of investment strategy— when it comes to making money, since the stock market’s crash in 2009 both stocks and bonds are worthy of some sexiness.

Looking back three years and to the performance of both the stock and bond markets as represented by mutual fund performance figures, from April 9, 2009 through April 12, 2012, S&P500 Index funds have provided their investors with a 19.2 percent average annual return, according to Lipper. The average U.S. diversified equity fund’s performance was 18.8 percent.

That’s not too shabby given that history has shown that once a stock market crashes investors tend to flee equities faster than a gazelle trying to escape the jaws of a cheetah. But given the unusual nature of the recent equity crash, both stocks and bonds have served investors well. Sexiness and making money have abounded everywhere!

Looking only at the performance of bond funds over that same three-year time frame, the average general domestic taxable fixed-income fund was up nearly 13 percent. The big juice in the domestic bond fund world came from high-yield funds; performance there averaged 19.3 percent. Or, nor much more than what the average stock fund returned.

If you had invested in a bond fund and into a flexible income fund— ones in which 85 percent of the assets are invested into income from debt, preferred and convertible securities and where common stocks and warrants investing can’t exceed 15 percent— you’d be sexier still: The average return on flexible income funds over the last three years has been 21.6 percent.

But that’s the past and the big question for investors going forward centers around where the sexy returns will be found?

The yields on short-maturing bonds don’t have much of anywhere to fall—hence very little space to pick up income from interest or gains from the sale of them. There is, however, more room for money-making in the low-quality and high-yielding bond arena for investors willing to take the risk and not worried about interest rates jumping up.

As for stocks, well, the pros warn us not to expect much from them this earnings this season. And with a contentious presidential election underway and money problems around the globe it’s anybody’s guess how all will play out for equities during the rest of this persnickety yet already prosperous year.

If there is one thing that’s quite likely, it’s that by this time next year there will be some investors in both the fixed-income and equity markets who will be boasting of their sexy returns thanks to the investment risks they’ve taken.