1. JPMorgan Core Bond Fund JCBUX

2. Commerce Bond Fund CFBNX

3. TCW Core Fixed Income I TGCFX

4. Black Rock Bond Index Fund WFBIX

5. Earnest Partners Fixed Inc Fund EPFTX

Portfolio construction involves thinking about both return and risk.  The traditional role of fixed income – generally synonymous with “bonds” but also including other types of assets that pay a contractual rate of interest over defined time periods – is to reduce a portfolio’s overall risk.  Fixed income assets perform this function because they are typically less prone to wide variations in price on a year-to-year basis.  For example a broad fixed income benchmark like the Barclays US Aggregate Bond Index tends to vary by less than 1/3 the amount that the S&P 500 Stock Index does in any given year.  That means your returns are more predictable – and in return you sacrifice the upside potential that riskier assets like stocks or commodities can deliver.

The importance of fixed income as a protection against risk can be seen very clearly in any analysis of the past ten years.  From November 1, 2000 to October 31, 2010 the S&P 500 returned an annual average -0.02% while the Barclays US Aggregate Bond Index returned 6.4% on an average annual basis for the same period.  Yet the risk of the S&P 500 (as measured by standard deviation) was 16.5% versus 3.4% for the bond index over that time period.

Whether or not that kind of performance continues (and there are good reasons to believe it may not), fixed income always has an important role to play in managing portfolio risk.  It is also important for investors who need to ensure stability of income generation in their portfolios.  With that in mind we introduce this week’s featured Jem5 investor.

Robert Gibson

Robert is 55 years old, an architect who has worked at several small design firms over the course of his career.  Because his employers have not tended to be the kind of large companies that can afford generous pension benefits Robert has over the years set up his own portfolio to provide a cushion for when he retires, which he would like to do by 65 if possible.  Robert has had most of his money invested in a variety of common stock funds, and he thinks that now is the time to start to balance the growth orientation of the portfolio with more predictability in terms of preservation of capital and a reliable stream of income payments from coupon interest. Fund manager tenure is also important to him.

Robert has been following the news and he has heard that many investors are concerned about the bond market – problems with debt payments in second-tier European countries, a very high level of debt in Japan, and even concerns about the ability of US Treasuries – the traditional safest of havens for risk-averse investors – to promise the security they have always delivered.  But he also believes those low levels of risk from year to year (compared with equities) means that he should not have too many sleepless nights.  Robert decides that diversified bond funds – containing a mix of different credit types (governments, corporate investment grade, mortgage backs and others) and different maturities from short to long term – can be the best way to minimize overexposure to any one segment while meeting his risk and income criteria.  He sets up his Jem5 profile and looks at the results:

Jemscore: Robert notices that the composite Jemscores are pretty close for all of these top rated funds.  Remember that the Jem 5 represents the top funds in this category for Robert’s profile, so they’re all likely to be quality funds that could meet his needs.

Risk/Return: All of the funds have reasonably good risk/return scores with the top three funds offering the best bet.  The TCW fund achieved a solid double-digit return over the past three years while risk measures like standard deviation and beta are on a par with the other funds.

Fees / Income /Fund Manager: Robert specified reasonable fees and good income prospects as areas of importance to him.  JPMorgan and TCW are fairly comparable on the fee side, while TCW seems to offer a better bet in the income score. What pulls TCW down is a very low fund manager score compared to the others.  Had Robert not indicated that fund manager tenure was important to him, TCW may well have ranked higher – but that’s an example of where the power of personalization comes into play at Jemstep.

*Note: Jem 5 is a regular feature on the Jemstep blog which represents our top mutual fund ratings for unique investor profiles. For more information, read our first post in the series.

TAGS: mutual fund analysis, mutual fund ratings, mutual fund research