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Best bond funds for avoiding the nasty surprises

WHAT ARE WE LOOKING FOR?

With interest rates rising, bond funds have been smacked around a bit lately. People buy bond funds to avoid nasty surprises - let's see which funds deliver.

TODAY'S SEARCH

We're seeking a mix of defensive qualities in tough times, plus the ability to earn a decent rate of return over a longer period. So let's look for funds in the Canadian bond category that have lost less than 3 per cent in the first half of 2007, while also earning a five-year compound average annual rate of return that exceeds the category average of 4.39 per cent.

Finally, let's look for funds that scored well over the past five years using a risk measure called beta. Beta compares a fund's volatility to its benchmark index, in this case the Scotia Capital Universe Bond Index, which itself would have a beta score of 1. A beta of less than 1 shows less

volatility than the benchmark, while a beta of greater than 1 shows more volatility. For

instance, a beta of 1.2 is 20 per cent more volatile than the benchmark.

Final note: While 44 funds made it through our screen, we narrowed the list down to those with the best year-to-date returns.

SO WHAT DID WE TURN UP?

A mixed bag, to put it mildly. There are high-fee and low-fee funds here, big funds and tiny ones and both index funds and actively managed funds. An example of a high-fee fund would be Northwest Canadian Bond, where the management expense ratio of 1.88 per cent tops the

category average of 1.72 per cent. The low-fee funds include a pair of strong-performing products from Phillips Hager & North that also happen to be among the larger funds in the Canadian bond category.

Note the presence of some bond index funds, which are an overlooked corner of the bond fund world. These funds passively track various bond indexes rather than having a manager

actively run the show, and the cheaper operating costs are

reflected in low or at least below-average fees. The presence of the iShares Cdn Short Bond Index Fund is also worth noting

because this exchange-traded fund (it trades like a stock)

focuses on lower risk short-term bonds. The low MER of 0.25 per cent helps, too.

NEXT

Head to the fund filter on

Globefund.com and create your own screen for funds in the

Canadian bond category.

As of June 30, 2007Last
YTD5-yr5-yrNet assetsreported
Fund nameret %ret %beta(000s)MER
Cote 100 Income0.54.90.658761.55
iShares CDN Short Bond Index0.54.90.73682,1660.25
Strategic Security NR Port 2-Ver 20.54.40.26
Strategic Security Reg Port 2(Ver2)0.54.70.31
SEI Canadian Fixed Income-O-0.56.10.971,800,0170.12
Northwest Canadian Bond-0.54.40.8135,5051.88
United-Cdn Fixed Income Pool Cl W-0.75.90.891,701,3910.17
PH&N Total Return Bond-A-0.86.10.931,137,8400.59
RBC Canadian Bond Index-0.84.70.92143,9740.70
SEI Canadian Fixed Income-I-0.85.30.976,3851.03
Ferique Bond-0.85.50.98165,4200.54
PH&N Bond-A-0.95.90.96965,7030.59
Sceptre Bond - O-1.05.80.9980,381
Integra Bond-1.05.40.9488,2351.61
TD Canadian Bond Index- e-1.15.41.000.48
Mawer Canadian Bond-1.15.20.9776,3120.95
Quebec Professionals Bond-1.14.80.90601,0951.04
CIBC Canadian Bond-1.24.90.99994,6371.58
Twenty-First Century Cdn Bond-1.24.70.886,5831.06
Trimark Canadian Bond-1.25.10.931,275,7731.28
RBC Advisor Canadian Bond-1.25.00.99147,5050.88
MD Bond-1.24.90.991,431,8280.94
As of June 30, 2007Last
YTD5-yr5-yrNet assetsreported
Fund nameret %ret %beta(000s)MER
Leith Wheeler Fixed Income-1.25.30.9046,2300.80
FMOQ Canadian Bond-1.25.10.95178,1470.95
Scotia Canadian Bond Index-1.24.90.9981,2691.00
TD Canadian Bond-1.35.80.978,904,3511.07
HSBC Canadian Bond-I-1.34.80.94107,8701.24
Altamira Income-1.34.50.96458,9391.07
Fidelity Canadian Bond-B-1.34.90.99161,5291.33
SEI Canadian Fixed Income-P-1.35.20.9644,1531.81
GGOF Canadian Bond Classic-1.34.80.962,6101.14
Scotia Canadian Income-1.44.90.981,365,2811.49
TD Canadian Bond-A-1.45.50.971.39
Putnam Canadian Bond-D-1.54.90.991.10
Sceptre Bond - A-1.54.91.0010,4271.08
Fidelity Canadian Bond-A-1.54.81.00344,3371.65
Investors Canadian Bond-1.64.40.931,229,8022.01
Bissett Bond-A-1.64.51.003,616,9071.44
RBC Bond-1.64.70.913,482,7491.46
imaxx Canadian Bond-1.74.90.989,9351.82
Dynamic Canadian Bond Fund-1.74.60.95200,9461.76
BMO NB Bond-2.44.50.8465,8200.96
TD Real Return Bond-2.76.70.981,598,9271.44
TD Real Return Bond-A-2.76.60.971.46

SOURCE: GLOBEFUND

© 2007 The Globe and Mail. All rights reserved.

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