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Home > Cases > Other Bond Funds > Other Bond Funds Overview

Investments Sold as Safe and Low Risk Lost Substantially

Bonds are supposed to be safe investments. And bond funds are supposed to be relatively stable investments. Yet many bond funds are losing value as a result of the subprime mortgage crisis.

Bond funds are a type of investment company that invest in a variety of bonds or other types of debt securities — government bonds, municipal bonds, corporate bonds, convertible bonds, mortgage-backed securities, zero-coupon bonds.

Of the mortgage-backed securities, many are issued by private financial institutions like Countrywide Financial Corp. and Citigroup Inc. Some of these mortgage securities are based on subprime loans — which are where bond funds have run into trouble. Over the past year, rising default rates among subprime borrowers has provoked a massive sell off of mortgage securities. This fire sale has dragged down various bond funds which were heavily invested in mortgage-backed securities.

According to Morningstar Inc., a fifth of all investment-grade U.S. taxable bond funds are in the red this year. Some of the biggest losers include funds managed by Morgan Keegan, State Street, and Charles Schwab (click the links to view our investigations into these funds). But many other bond funds are also struggling. Five of the worst performers are detailed below.

Fund Name YTD Return (as of 4/30/08) % of Portfolio in Mortgages Category
Van Kampen Limited Duration Fund (ACFMX) -6.58% 44.80% Short-Term Bond
UBS Absolute Return Bond Fund (BNRAX) -8.26 12.18 Short-Term Bond
Morgan Stanley Institutional Fund Trust (MPLDX) -7.79 44.33 Short-Term Bond
Metropolitan West Strategic Income Fund (MWSTX) -6.12 31.23 Short-Term Bond
Principal Investors Fund Inc (USBIX) -7.32 43.68 Ultrashort Bond

Van Kampen Limited Duration Fund (ACFMX)

The Van Kampen Limited Duration Fund (Nasdaq: ACFMX) is a short-term bond fund under the direction of Van Kampen Investments. Year-to-date returns are down nearly 7%. Nearly 40% of the funds portfolio is in collateralized mortgages obligations. Another 20% resides in other asset-backed securities. Its ranking among peers over the past year puts it in the 94th percentile, ranking among the worst in its group (Peer Index - Lipper Sht Inv Grd Fd IX).

UBS Absolute Return Bond Fund (BNRAX)

UBS Absolute Return Bond Fund (Nasdaq: BNRAX) is a short-term bond fund from UBS Global Asset Management. Year-to-date, the fund is down over 8%. Twelve percent of the funds portfolio is in mortgage securities. Among its peers, the fund ranks in the 100th percentile, worst in the group (Peer Index - Lipper Global Inc Fd IX). Last year the fund was down nearly 7%, while its peers gained nearly 7%.

Morgan Stanley Institutional Fund Trust — Limited Duration Portfolio (MPLDX)

Morgan Stanley Institutional Fund Trust — Limited Duration Portfolio (Nasdaq: MPLDX) is a short-term bond fund. Year-to-date returns are down nearly 8%. The fund's mortgage holdings amount to over 40% of its portfolio. The fund ranked near the bottom among its peers, in the 95th percentile (Peer Index - Lipper Sht Inv Grd Fd IX).

Metropolitan West Strategic Income Fund (MWSTX)

Metropolitan West Strategic Income Fund (Nasdaq: MWSTX) is a short-term bond fund. Year-to-date, the fund is down over 6%. Over 30% of the funds portfolio is in mortgage securities. The fund ranked last, the 100th percentile, among its peers (Peer Index - Lipper Multi-Sect Inc IX). Last year the fund was down over 3%, while its peers were up over 4%. Over the past year the fund has lost over 13% of its value.

Principal Investors Fund Inc — Ultra Short Term Fund (USBIX)

Principal Investors Fund Inc — Ultra Short Term Fund (Nasdaq: USBIX) is an ultra short bond fund. Year-to-date the fund is down over 7%. Over 40% of the funds portfolio is invested in the mortgage sector. The fund ranked in the 96th percentile, near the bottom, among its peers (Peer Index - Lipper Sht Inv Grd Fd IX). Over the past year the fund is down nearly 10%. In 2007, the fund was down almost 2%, while its peers gained nearly 5%.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.


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