Bond funds with good returns

It’s become an article of faith among investors: over the long haul, stocks will outperform bonds.

Oh really? Well, consider this startling fact. Over the past 20 years (to Jan. 31), the average Canadian bond fund returned 9.4 per cent annually. The average Canadian equity fund returned 9.3 per cent. Sort of blows that theory out of the water, doesn’t it?

The obvious conclusion is that you sacrifice very little return potential over the long term by including a higher percentage of bonds in your asset mix, and you greatly increase your personal comfort level by reducing your risk exposure in tough times. But for some reason, many people still can’t accept what seems to be heretical thinking.

Of course, bonds have fared particularly well recently, thanks to low interest rates and a poor stock market. All the expert thinking now is that bond prices are likely to fall in the coming months, as interest rates are moved higher.

That could certainly happen. But remember, the conventional wisdom suggested exactly the same outlook a year ago at this time. The reality proved to be quite different.

I personally feel that a good bond fund is a worthile addition to a portfolio at any time, as long as you plan to retain your units for several years. We’ve owned the Phillips, Hager & North Bond Fund for over a decade, through good bond markets and bad, and been rewarded with an average annual gain of 8.5 per cent over that time. We certainly aren’t complaining.

There are many bond funds available to investors. I prefer no-load funds with relatively low management expense ratios, as they provide the best return for your money. Here are two that recently passed their third anniversary and therefore qualify for a formal rating in my On-Line Mutual Funds Database. Both received a $$$ rank (out of four)

That was much better than the no-load Royal Bond Fund and slightly ahead of the return posted by the Royal Canadian Bond Index Fund. Note that the MER on this fund is only 0.88 per cent, much less than that of the Royal Bond Fund, because of the semi-passive management style. Although a commission is payable if you buy any of the RBC Advisor funds, you may want to take a close look at this one, especially for a registered plan. Ask your broker or planner to acquire it on a zero front-end load basis. He or she will receive an annual trailer fee as compensation.