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By Morningstar.com | 08-09-2017 02:00 PM

3 Good Satellite Bond Fund Holdings

PIMCO Mortgage Opportunities, T. Rowe Price High Yield, and Lord Abbett Floating Rate are good options to expand fixed-income exposure.

Jeremy Glaser: Investors looking to expand their fixed-income exposure beyond core bond funds can face an enormous number of often bewildering choices. Our analysts share some of their favorite options among high-yield, bank loan, and nontraditional funds that could make good satellite bond holdings.

Miriam Sjoblom: Like other nontraditional bond funds, PIMCO Mortgage Opportunities doesn't pay attention to benchmarks. Unlike some of those funds, which can be much more wide-ranging, this fund's approach is narrower. It sticks mainly with mortgage-backed securities, balancing both high-quality agency mortgages with bonds that have some credit risk associated with them. This approach works because PIMCO has an edge in analyzing securitized bond sectors. The fund does take a lot of risk, but the team has been effective at managing those risks. You'd want to consider this fund if you're looking for diversification away from traditional market risks, and if you're looking for a portfolio that'll hold up a little bit better when rates are rising.

Seth Sherwood: Within the high-yield Morningstar category, few funds have our confidence like T. Rowe Price's Gold-rated High Yield bond fund. Head PM Mark Vaselkiv has led a seasoned team of professionals in performing rigorous fundamental analysis since taking over the fund in 1996. Over that 20-year period, the team has successfully negotiated a variety of market environments, including the most recent commodity sell-off, where they fared well, despite having a significant stake in CCC-rated credit. The fund does have foreign exposure, about a third of the fund, with much of that in emerging-market corporate bond. T. Rowe Price has been responsible about managing asset growth, closing the fund at times in the past when Vaselkiv has seen opportunities as scarce. The fund is one of the cheapest in the category.

Kenneth Oshodi: Due to their floating-rate interest payments, bank loans are a good idea if you're worried about rising rates. We like Lord Abbett Floating Rate for several reasons. It's run by the experienced management team of Jeffrey Lapin and Stephen Rocco, and has also added to its analyst ranks in recent years. Although fundamentally driven, Lapin proudly uses Lord Abbett's macroeconomic views in leading this fund, and freely shifts its allocation as he identifies relative value opportunities. He's also not afraid to avoid sectors heavily favored by peers or the fund's benchmark. Deft macro moves and a cheap price help this fund to remain on top.

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