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No. of Recommendations: 3

There are dozens of very competent bond managers whose funds are worth buying. "All" that is required to do so responsibly is the usual due-diligence one should always use when buying anyone's financial products, plus a solid plan to manage the risks of the instrument. In other words, forget about the backward-looking ratings of agencies such as Morningstar and, instead, actually read the fund's prospectus, pull their schedule of holdings, dig into what they are buying/selling, and chart the fund to see how it performed in various market environments and how "tradable" it is, meaning, how easily it might be to manage its risks.

What a bond fund isn't is a bond. Instead --like a stock fund-- it is a derivative that has an often loose relationship to its underlying. But what those derivatives can offer is exposure to assets that just aren't available to us small retail investors. Seriously, pull the holdings of a bond fund that holds something other than just vanilla Treasuries. What you'll find is that many of the holdings aren't issues that have ever turned up in your bond scans. Why? Because the big boys grabbed all of the issue when it came to market, and none of it trades in the secondary market.

One fact about bonds that (almost) no one really understands or takes seriously is this. Stocks --as an asset-class-- typically offer higher return than bonds (as an asset-class) because they are far, far 'riskier' (however that word is defined). But on a risk-adjusted basis, bonds have to offer the same rewards as any other asset-class, or else the arbs step in to make it so. Thus, when conditions are favorable and bonds are being under-priced, some very serious money can be made with them that rivals other asset-class even on an absolute return basis. Not often, and not in our present investing environment. But if you'll look back at market history, you'll see there are years when bonds killed stocks and why they shouldn't be neglected/ignored. E.g., look at the 54% returns offered by long-dated Treasury zeros in '94, which could have been accessed through funds offered by AmCent. And more than once, I've made 100% per year for my holding-period of a "fallen angel".

Lastly, when considering a bond fund, build a correlation matrix for it and try to discover exactly what it offers by way of true diversification that a different instrument or tactic wouldn't.

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