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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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M*: 3 Bond Funds You May Be Tempted To Buy But Shouldn't: (THOPX) - (NHMRX) - (LSFYX)

FYI: It’s easy to identify funds with strong records. But as my colleague Russ Kinnel noted recently, it takes more than a strong record to earn a Morningstar Analyst Rating of Gold, Silver, or Bronze. Those medals reflect our expectation that a fund will be a standout performer in the future, and that requires a deeper investigation into a fund’s fundamentals to determine whether it has a sustainable competitive advantage. If our analysts aren’t convinced that a fund can continue to deliver strong results, they’ll assign it a Morningstar Analyst Rating of Neutral or possibly Negative.

When a fund with a great record earns a Neutral rating, we get questions. In the world of bond funds, the reason our analysts take a skeptical view of past performance often comes down to risk. We ask ourselves the following questions:


  • Interesting. THOPX is a popular one around here, I believe. Anyone have a counterpoint to Morningstar's concerns?
  • We have owned THOPX in the distant past and in recent years, missing it's period of poor performance by blind luck. It's performance of late has been outstanding. M* has long questioned the small team at Thompson and has expressed doubts but it's rare for them to issue a "shouldn't buy" warning. Anyone here consider this article actionable? Anyone have a replacement in mind? When I started building my position in THOPX it was because risk free options were yielding near zero. Now the yield here isn't so great compared to the zero risk choices. Something to think about.
  • For buy-and-hold investors, I don’t see the problem with THOPX. I owned it for a while, including its swoon a few years ago, but its returns over 1, 3, 5, 10 years have been excellent. I don’t understand why M* bashes funds like THOPX but continues to tout funds like MWTRX that have had miserable returns in recent years while becoming bloated with assets. Many so-called quality bond funds have gotten killed by rising interest rates and have seemingly done little or nothing to ease the pain for investors. As long as interest rates continue to rise, investors seeking quality apparently would be better served by ultrashort bond funds, money markets or CD ladders.
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