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Investors' guide to stormy market: Find havens

Fund managers who have made money this year point to longer-term bonds and a careful selection of stocks.

By Jesse EmspakContributor to The Christian Science Monitor / September 19, 2008

New York

The bear market left many investors mauled, but there are some places to wait out the attack without leaving the market entirely.

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That's the view of portfolio managers who have guided their mutual funds to profits so far this year, despite the deep slump in stock markets. The common threads among these top-performing funds? A move to bonds and a willingness to look at companies on their merits.

Bonds are the traditional haven in bad markets. Most of the time, their prices rise when stocks fall, as investors seek guaranteed payments over the risk that stocks will fall further.

The big winner in bear markets is usually debt issued by the US Treasury, and this one was no exception. Yields on the 10-year Treasury note, a common benchmark, fell to 3.43 percent and a price of $104.76 on Wednesday. Bond yields and prices move in opposite directions. The yields on shorter-term Treasuries also fell, the two-year note down to 1.78 percent. Yields on the three-month Treasury bill fell to a 54-year low of 0.23 percent before settling at 0.7 percent.

These yield declines have helped bond funds, said Zane Brown, fixed-income strategist at Lord, Abbett & Co., a money-management firm in Jersey City, N.J.

The T. Rowe Price US Treasury Long-Term Fund rose 4.27 percent over the last month and 8.06 percent year-to-date, putting it in the top 10 bond funds for both periods, according to Morningstar.

Meanwhile, the Standard & Poor's 500 closed at 1156.39 Wednesday, down 21 percent so far this year. Over the last month the index has fallen 11.5 percent. Mr. Brown noted that with bonds, you get paid to wait out the turmoil in the markets. Earlier in the year, inflation was a worry for bond buyers – as inflation rises the value of a bond goes down, since the payout is fixed. That's changed as the price of oil and other commodities has fallen. Another factor is unemployment, which is 6.1 percent. That keeps wages in check, further crimping inflation.

With a lower-inflation environment looming, Brown said longer-term municipal bond funds are also a good place to look. He noted that usually the yields on muni bonds are about 85 percent of Treasury bonds. But in the last several months, yields on munis have gone to 100 percent of Treasuries with similar durations.

Usually that signals that munis are out of favor because local governments have credit problems. But so far this time, most municipalities and states haven't had their credit ratings lowered.

And while the crisis in the housing market is a big problem for those trying to sell their homes, it's less of a problem for local tax bases because houses are usually assessed below their market value. That gives local tax collectors some breathing room, Brown said.