Only six bond funds make a list of the 100 mutual funds with the most assets in 401(k) plans. Two are index funds: Fidelity Spartan U.S. Bond Index (symbol FBIDX) and Vanguard Total Bond Market Index (VBMFX). Two more are designed to protect investors against the effects of rising inflation: Vanguard Inflation-Protected Securities Fund (VIPSX) and Pimco Real Return (PRTNX). The remaining two, Pimco Total Return (PTTRX) and Dodge & Cox Income (DODIX), are medium-maturity bond funds.
In years past, we might have recommended a broad-based bond index fund such as the Fidelity and Vanguard funds. But with bond yields near all-time lows, these Treasury-heavy portfolios are susceptible to rising interest rates (rates and bond prices usually move in opposite directions). Meanwhile, both Vanguard Inflation-Protected Securities and Pimco Real Return had the majority of their assets in Treasury inflation-protected securities. This is not a great time to invest in TIPS; they are expensive, and the funds are likely to lose value if interest rates rise. You're better off holding funds with low exposure to Treasuries and with managers who have the flexibility to navigate the bond market's potentially treacherous waters. Pimco Total Return and Dodge & Cox Income fit the bill.
The portfolios of target-date funds automatically reset the mix of stocks, bonds and cash over time, becoming less risky as they approach their target date. Fidelity, T. Rowe Price and Vanguard control 75 percent of all target-date assets, which explains why their funds dominate the 401(k) list. The Vanguard and Price funds regularly rank among the top 20 percent of their peer groups over the long haul. Vanguard's target funds typically hold Vanguard index funds, including Total Stock Market and Total Bond. Price leverages many of its best funds, including New Horizons, in its target funds.
Fidelity Freedom funds, however, have lagged their Vanguard and Price counterparts. One reason: lousy performance in the underlying funds. Take Freedom 2040 (FFFFX), which sank 39 percent in 2008. Its top two holdings that year -- Fidelity Disciplined Equity and Fidelity Equity-Income -- lost more than 40 percent each. Fidelity has since retooled the Freedom funds and created a special group of Series funds to fill them, alongside other Fidelity funds. Star managers Will Danoff, of Contrafund, and Joel Tillinghast, of Low-Priced Stock, run two such Series funds. But because the mandates for the Series portfolios differ from those of their existing funds, we want to see how the managers perform with the new products. And we're taking a wait-and-see approach toward the Freedom funds as well.
(Nellie S. Huang is a senior associate editor at Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit http://www.Kiplinger.com.)
In years past, we might have recommended a broad-based bond index fund such as the Fidelity and Vanguard funds. But with bond yields near all-time lows, these Treasury-heavy portfolios are susceptible to rising interest rates (rates and bond prices usually move in opposite directions). Meanwhile, both Vanguard Inflation-Protected Securities and Pimco Real Return had the majority of their assets in Treasury inflation-protected securities. This is not a great time to invest in TIPS; they are expensive, and the funds are likely to lose value if interest rates rise. You're better off holding funds with low exposure to Treasuries and with managers who have the flexibility to navigate the bond market's potentially treacherous waters. Pimco Total Return and Dodge & Cox Income fit the bill.
The portfolios of target-date funds automatically reset the mix of stocks, bonds and cash over time, becoming less risky as they approach their target date. Fidelity, T. Rowe Price and Vanguard control 75 percent of all target-date assets, which explains why their funds dominate the 401(k) list. The Vanguard and Price funds regularly rank among the top 20 percent of their peer groups over the long haul. Vanguard's target funds typically hold Vanguard index funds, including Total Stock Market and Total Bond. Price leverages many of its best funds, including New Horizons, in its target funds.
Fidelity Freedom funds, however, have lagged their Vanguard and Price counterparts. One reason: lousy performance in the underlying funds. Take Freedom 2040 (FFFFX), which sank 39 percent in 2008. Its top two holdings that year -- Fidelity Disciplined Equity and Fidelity Equity-Income -- lost more than 40 percent each. Fidelity has since retooled the Freedom funds and created a special group of Series funds to fill them, alongside other Fidelity funds. Star managers Will Danoff, of Contrafund, and Joel Tillinghast, of Low-Priced Stock, run two such Series funds. But because the mandates for the Series portfolios differ from those of their existing funds, we want to see how the managers perform with the new products. And we're taking a wait-and-see approach toward the Freedom funds as well.
(Nellie S. Huang is a senior associate editor at Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit http://www.Kiplinger.com.)
