Multi-Sector Bond Funds Offer Way to Boost Yield

Investors seeking income are having a difficult time finding it.

With the Lehman aggregate bond index yielding a mere 3.57%, neglected multi-sector bond funds offer a relatively safe way to go for higher payouts.

Multi-sector funds invest in a wide range of income-oriented securities, including domestic and foreign government bonds, corporate bonds and high-yield debt. The funds’ ability to venture into emerging markets and the junk bond sector frightens away some potential investors. However, multi-sector funds haven’t lost money as a group during any one of the last 10 years.

One reason is diversification. The funds’ exotic investments each tend to march to a different beat. When emerging market bonds are losing ground, there’s a good chance that high-yield bonds or U.S. Treasury securities are posting gains, and vice versa.

Keep in mind that there are wide differences between multi-sector funds. Some funds load up on emerging market debt, while others are deeply invested in the high-yield market. And a few multi-sector funds keep most of their money in plainer fare such as Treasuries and high-quality corporate issues.

Janus Flexible Income is one of the most conservative multi-sector offerings. Manager Ronald Speaker has run the fund since 1997, outpacing his peers while taking modest risks. The fund has gained 6.3% annually during the last five years.

Treasury and investment-grade corporate bonds account for about 90% of Speaker’s assets. Thus, the fund provides less chance for portfolio diversification than its typical peer. Still, it recently yielded a respectable 4.4% -- and it offers a better chance at long-term capital gains than a typical bond fund.

Loomis Sayles Bond is among the riskier funds in the multi-sector category. The fund has gained 8.3% annually during the last five years -- above average for its category. Managers Dan Fuss and Kathleen Gaffney aren’t afraid to invest in emerging market debt and risky corporate bonds. That contrarian approach helps bolster the fund’s yield, recently 6.7%.

The team also invests in real estate investment trusts, and maintains a long duration, which means the fund’s holdings are likely to fluctuate with moves in interest rates. That approach could hurt shareholders if rates rebound from their recent lows and cause bond prices to fall.