Strategic Income Funds: Increase Your Yield With Only Somewhat More Risk

The cheap way to invest in bonds is to buy them directly and sit on them to maturity. But you can't always do that with foreign bonds or you may not have the dough to fork over $10,000 for an individual bond (which is often the denomination). Moreover, you may want to substantially increase the diversity of your bond portfolio.

What to do?

Consider strategic income funds. Strategic income funds invest their money in all kinds of bonds, from the safest to the riskiest. Often they hold U.S. Treasury bonds, junk bonds (bonds that are rated below investment grade by the bond rating agencies), bonds issued by blue chip companies, bonds from Fannie Mae and other mortgage-backed issuers and foreign bonds.

The idea with these funds is that you pay someone to spot changes in interest rates, risk and other factors so that she or he will move your money into the highest yielding bonds. At the same time, the manager will attempt to make sure that you're sufficiently diversified. Of course, you could do this yourself, but think about the aggravation of the paperwork, not to mention the constant research you'd have to do.

To measure the risks and rewards of strategic income funds, it's a good idea to look at what you would have gotten had you been invested in government bonds, junk bonds and foreign bonds over the last five years. Government bond prices were relatively stable and yielded about 9.5 percent a year. Junk bonds delivered a whopping 14 percent a year but were quite volatile. Foreign government bonds delivered 16 percent a year but with even higher volatility than junk bonds.

Now let's look at strategic income funds, which invest in all three. They delivered about 10.4 percent a year over the last five years. Their share prices were, as you would expect, more volatile than government bond mutual funds but considerably lower than junk or foreign bonds mutual funds.

Here are some strategic income funds to consider:

Janus Flexible Income Fund has no sales load, low annual expenses (0.91 percent of assets), and an average annual return of 13.8 percent over the last five years ending September 30, 1995. John Hancock Strategic Income Fund A has higher annual expenses and a 4.5 percent sales load but has returned 12.6 percent over the last five years. Putnam Diversified Income Fund (A) charges a load of 4.75 percent, expenses of 1.01 percent and posted an annual average return of 12.4 percent.

Bottom line: it's possible to achieve higher yields on your bond portfolio yet also to limit risks.

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