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5 Best Performing Investment Grade Bond Mutual Funds in 2014

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The iShares Barclays Aggregate Bond Fund (AGG - Free Report) has notched gains of 2.4% so far this year. This index, which is a measure of the investment-grade debt, reflects the positive that bond funds have been enjoying so far this year.

The low-rate environment is most likely to continue for some more time and perhaps the baby boomer generation is not yet ready to give up on their bond funds. A low interest rate environment is favorable for investments in bond funds. This stems from the fact that the market value of a bond is inversely proportional to interest rates.

Coupled with the low-rate environment, economic data has been mixed of late and the geopolitical tensions have sparked volatility in equity markets. Also, the benchmark 10-year Treasury yield is down to about 2.5% level from 3%, reflecting inflating Treasury prices.

Investing in investment grade bond funds is a prudent step in the current scenario. However, before we cherry pick the top 5 performing investment grade bond funds of this year so far, let’s look into what investment grade bonds are.

Definition of 'Investment Grade'

Bonds are assigned ratings based on credit quality. Bond rating firms, like Standard & Poor's, assign the ratings using upper- and lower-case letters. Usually, 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are the investment grade bonds.

Government bonds, or Treasuries, are not assigned any rating. They generally qualify as the highest credit quality bonds.

Federal Reserve Trims Bond Buyback, Rates Remain Low

The Federal Open Market Committee (FOMC) in its latest two-day policy meeting gave no hints about the timing of an increase in the federal funds rate. The Federal Reserve said the rate hike may take “considerable time” after the end of its bond buying program.

Meanwhile, the FOMC stuck to its plan of steadily wrapping up the quantitative easing program by announcing another $10 billion cut to the bond-buying program. The monthly purchases of Treasury and mortgage-related assets now stand at $25 billion.

GDP Report

The U.S. economy rebounded in the second quarter with GDP growth coming in stronger than expected. According to the “advance” estimate by the Bureau of Economic Analysis, the second quarter output of goods and services produced by labor and property located in the United States increased at an annual rate of 4.0%, more than the consensus estimate of an increase by 3.2%.

This rise in second quarter GDP was in sharp contrast to first quarters’ decline in real GDP by 2.1%. First quarter GDP was revised from an earlier estimate of a decline by 2.9%. The US economy had contracted in the first quarter for the first time in three years. Harsh winter weather was cited for hampering business operations and slowing down construction.

Subpar economic growth may have played a role in yield decline this year. However now, the recent GDP numbers are encouraging enough. Growth will need to pick up the pace before yields jump. Inflation too should exceed the central bank’s target of 2%.

Agency Downgrade to Junk

Interestingly, Investopedia notes: “Investors should be aware that an agency downgrade of a company's bonds from 'BBB' to 'BB' reclassifies its debt from investment grade to "junk" status with just a one-step drop in quality. The repercussions of such an event can be highly problematic for the issuer and can also adversely affect bond prices for investors. Safety-conscious fund investors should pay attention to a bond fund's portfolio credit quality breakdown.”

5 Best Performing Investment Grade Bonds YTD

Here we will share the 5 best-performing year-to-date investment grade bonds that also sport a Zacks Mutual Fund Rank #1 (Strong Buy). Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

Delaware Extended Duration Bond Fund Class A (DEEAX - Free Report) invests mostly in corporate bonds that carry investment grade credit ratings. These ratings are assigned by a nationally recognized statistical rating organization (NRSRO). However, the fund may also invest a maximum of 20% in high yield corporate bonds. Though the fund may invest a maximum of 35% in foreign securities, the non-U.S.-dollar currency exposure is limited up to 25%.

The fund has returned 13.3% year to date.

The top holdings include Ultra Treasury Bond Future Sept14, Verizon Comms 6.4% and South Carolina Elec & Gas 4.5%.

GuideStone Funds Extended-Duration Bond Investor (GEDZX - Free Report) seeks maximum return along with capital preservation. The fund parks most of its assets in fixed-income securities. The fund may invest a maximum of 30% in non-US dollar denominated obligations. It may invest more than 30% when buying U.S. dollar-denominated securities of foreign issuers.

The fund has returned 13.5% year to date.

The top holdings include U S Treas Bd Stripped Prin Pmt, US Treasury Bond 3.625% and Grand Parkway Transn Corp Tex Toll 5.25%.

Vanguard Long-Term Investment-Grade Admiral (VWETX - Free Report) invests mostly in intermediate- and long-term investment-grade securities. The securities must be of high-quality (those with A3 or equivalent or better rating) or of medium-quality (equivalent of Baa1, Baa2, or Baa3).

The fund has returned 13.1% year to date.

The top holdings include US Treasury Bond 4.5%, Wells Fargo & Co New 5.606% and Illinois St Go Bds 5.1%.

SEI Institutional Investments Trust Long Duration A (LDRAX - Free Report) seeks to replicate returns of high quality corporate bonds carrying duration of 9-14 years. The fund invests majority of assets in long duration fixed income securities. A majority can also be invested in synthetic instruments or derivatives with similar economic characteristics of fixed income securities. The fund invests in investment grade fixed income instruments that have been either issued or guaranteed by the government.

The fund has returned 11.9% year to date.

The top holdings include NYSE/Liffe 2 Year US Treasury Note Future Sept14, US Treasury Bond 3.625% and

US Treasury Bond 2.875%.

Principal Preferred Securities A (PPSAX - Free Report) seeks current income. It invests most of its assets in preferred securities. Over 25% of assets may be invested in domestic and foreign financial services industry that includes banking, insurance and commercial finance. The fund also parks money in real estate investment trusts (i.e. REIT) and utility industries.

The fund has returned 9.9% year to date.

The top holdings include Jpmorgan Chase FRN, Qbe Cap Fdg Iii 144A FRN and Prudential Finl FRN.

To view the Zacks Rank and past performance of all investment grade bond mutual funds, investors can click here to see the complete list of funds.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our Mutual Fund Center.

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