If you’re looking to add a non-core component to your fixed income, there are two different ways to go about it. You can have a bond manager select what he or she feels is the right combination of core versus non-core investments for you—or you can choose to select non-core funds by yourself. Here, I list some key metrics for a selection of respected non-core funds (or funds with non-core components).
One particularly good yield metric is called yield to maturity. It’s the interest rate which makes the present value of the cash flows equal to the current price of the bonds in the bond market. Yield to maturity incorporates not just the periodic coupon payments but also the time to maturity and the principal amount you get back when the bond matures.
Another metric is duration, which is commonly used to measure interest rate sensitivity. It measures the percentage change in bond prices due to a one-time across-the-board 1% inverse change in interest rates. For example, a bond fund with a duration of 6 should fall in value by about 6% if interest rates rise across-the-board by 1%.
Finally, don’t place too much emphasis on historical returns without carefully considering all contributing factors. For example, core bond funds with long durations did relatively well in 2014, to a large extent because interest rates fell. But lower duration funds generally didn’t do as well for the same reason.
Notes: Source for assets, returns and MERs is Morningstar.ca, as of April 30. Sources for yield and duration figures are the fund companies, generally as of March 31 (except TD as of April 30). Source for hedging information is the fund companies and Morningstar. The version of bond funds cited is the “Advisor” Series or the “A” series, used by investors who purchase the fund through an advisor. TD and RBC offer “D” series versions of these funds for do-it-yourself investors, which have reduced fees by roughly 25 basis points. I have estimated the Templeton Global Bond Fund MER after adjusting for the recently announced 50 basis points reduction in fees. The historical MER reported by Morningstar is 2.2%. The version of the Fidelity American High Yield fund cited is not hedged, but other versions are.