Banking & Finance

Short-Term Bond Funds Serve a Purpose (LALDX, VBIRX, PRWBX)

Any positive return from a short-term bond fund offers investors a reason to flee the money market funds which are currently the equivalent of stuffing cash under a mattress. Over the past year or so, however, these short-term investments have profited from prudent plays in lower-rated corporate bonds and asset- and mortgage-backed securities.

Three of the larger short-term bond funds are the Lord Abbett Short Duration Income A Fund (LALDX), the Vanguard Short-Term Bond Index Admiral Shares Fund (VBIRX), and the T. Rowe Price Short-Term Bond Fund(PRWBX). Each follows a different path to steady, if uninspired, returns.

The Lord Abbett Short Duration Income A Fund (LALDX) holds a stake in 776 securities, with about 30% in commercial mortgage-backed securities and about 29% in investment grade corporate bonds. Miners Teck Resources  and Freeport-McMoran, DirecTV, General Electric, and fertilizer maker Mosaic Co. are all represented in the fund’s top 10 holdings. The fund does not invest heavily in US Treasuries, preferring instead to rotate sector investments in the short-term bond market. One-year NAV returns total 6.08%, and year-to-date returns total 2.46%. The fund gets a 5-star rating from Morningstar.

The Vanguard Short-Term Bond Index Admiral Shares Fund (VBIRX) seeks to track the Barclays US 1-5 Year Government/Credit Index. Nearly 70% of the fund’s assets are held in US Treasuries and another 23% are held in investment grade bonds. The fund holds no commercial or residential mortgage-backed securities. The one-year return is 3.48%. The funds’ weighting toward US Treasuries means this fund is insulated from a good deal of credit risk and is sensitive to interest rate changes. The fund has a 4-star rating from Morningstar.

The T. Rowe Price Short-Term Bond Fund (PRWBX) seeks to return high income with minimal risk either to principal or liquidity. Assets are spread largely among agency debt and investment grade securities. About 22% of the fund’s assets are held in ‘BBB’-rated bonds, giving investors exposure to a bit more reward for a bit more risk. Over the past 12 months the fund has posted a total return of 2.94%. The fund has a 4-star rating from Morningstar.

Another interesting divergence among these funds is their turnover. The LALDX sports a turnover of 143.5%, according to Morningstar. Vanguard’s VBIRX turns over at a rate of 60% and PBWRX turns over at 27.9%. The T. Rowe Price fund seems unusually low, while the Lord Abbett fund appears to be fairly high.  That being said, the shorter the average maturity the higher the implied turnover in a year.

It is not unusual for investors to park some investments in funds like these for the summer, where the money is safe while they take some time off for vacations. It’s better to do that than to move to a money market, especially with those interest rates of essentially zero.  Still, investors need to know that the shorter the average bond maturity the less likely that investors are to even keep up with the real rate of inflation.

Paul Ausick

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