Building a Better Bond Portfolio

“I’m nervous about interest rates, and yet I know I need to be invested in bonds,” an investor told us recently. “What can I do?”

A well-built portfolio should help you navigate many market conditions, including periods of higher and lower interest rates and default rates.

We’ve been adapting to changing markets for 47 years now, and we’ve found that investing in bond funds can help you mitigate risk, capitalize on new opportunities and respond to changing markets far more effectively than using individual bonds.

The bond portfolios we manage are entirely invested in funds and ETFs. With bond funds, you can have your money managed by some of the smartest and most experienced fixed income investment teams in the country.

You don’t have to worry about which companies are likely to repay their debts—most funds do it for you. Funds have teams of analysts who do in-depth research on companies before they buy their bonds; they don’t just rely on ratings agencies like Moody or Standard and Poor’s. And this research can be particularly valuable when it comes to lower-quality bonds issued by smaller companies because these companies often don’t pay to have their debt evaluated by the ratings agencies.

Funds help you stay diversified & mitigate risk

Diversification is another reason to own bond funds. Most funds own hundreds, if not thousands, of bonds, so if one bond defaults, the other positions can help offset losses. This is what happened with Enron, the energy company that went bankrupt 2001. Many bond funds owned Enron debt, but because these funds were broadly diversified, the default didn’t have as much of an impact on the funds. Enron’s bondholders, on the other hand, got next to nothing when the company went under.

Funds are an affordable way to own a diversified bond portfolio. It can take a lot of money (upwards of $1 million) to build a truly diversified portfolio of individual bonds, but you can buy a diversified portfolio of bond funds for just a few thousand dollars. You can invest in our Flexible Income Fund (INCMX) for as little as $1,000 and with INCMX, you’ll own a portfolio of 10-15 different bond funds, representing approximately 13,000 individual bonds.

Funds give you access to many different areas of the bond market

Today, many investors are concerned about changing interest rates. Investors know that when rates rise, bond prices fall. But higher rates don’t affect all bonds in the same way. Some bonds, like bank loans, high-yield bonds, or foreign bonds could hold up better than other bonds if rates rise, but these niche areas can be a challenge for most investors to buy on their own. Bond funds make it easy to invest in these different areas of the bond market.

Floating-rate funds, for example, can be appealing if interest rates rise because these funds invest in bank loans and the interest rates on these loans adjust as rates change.

Lower-quality bonds, like high yields, could also be a good investment if rates rise gradually because their higher yields could offset a decrease in bond prices.

And don’t overlook foreign bonds: while the U.S. is expected to experience higher rates, many other countries are cutting rates, and that means some foreign bond funds could offer better results than U.S. bond funds.

Funds help you adapt to changing markets

Bond funds keep you nimble and allow you to respond to changing markets. Re-shuffling a portfolio of individual bonds can be costly and time-consuming. But with a portfolio of funds, you can efficiently move your portfolio out of lower-quality bond funds and into higher-quality bond funds as we did in INCMX during the 2008 credit crisis. 

INCMX: a diversified, actively managed portfolio of bond funds that adapts to changing markets

Broadly diversified

Bond funds offer diversification, and funds of bond funds like the Flexible Income Fund (INCMX), which typically owns 10-15 bond funds, offer potentially greater
diversification. INCMX’s portfolio represents thousands of individual bonds. 

INCMX also may own total-return funds; these funds are not fully invested in bonds, so they typically have lower credit and interest-rate risk.

Access to many investment opportunities

INCMX can seek out opportunities in many different areas of the bond market. As of June 30, 2016, INCMX had exposure to corporate and government bonds, as well as
floating-rate (bank loan), high yield, and dollar-hedged foreign bond funds.

Adapts to changing markets

We change INCMX’s portfolio in response to changing markets. In the 2008 credit crisis, we moved the portfolio into short-and intermediate-term government bond funds and ETFs. As markets recovered, we took advantage of strong performing high-yield, strategic and world bond funds.

INCMX is available at most major brokers, often with no transaction fee. It can also be purchased directly from our shareholder services for as little as $1,000. Just call
1-866-455-3863 to get started.


Diversification does not assure a profit or protect against loss in a declining market.

Past performance does not guarantee future results. A Lipper Fund Award is awarded to one fund in each Lipper classification for achieving the strongest trend of consistent risk-adjusted performance against its classification peers over a three, five or ten-year period. Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper. Lipper Analytical Services, Inc. is an independent mutual fund research and rating service. © 2016, All Rights Reserved.

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