The Federal Reserve finally raised interest rates in December, and nontraditional bond funds fell in response. The average mutual fund and ETF suffered a 0.75% loss for the month, equaling half of its 1.50% decline for all of 2015. This compares to a lighter 0.32% December loss for the Barclays U.S. Aggregate Bond Total Return Index, which actually managed a 0.55% gain for the year.
But that's not to say that all nontraditional bond funds had a bad December or even a bad year. The month's top performers posted gains ranging from 1.58% to 2.53%, and although they weren't necessarily the year's best funds, their annual gains ranged from 2.38% to 6.65%. There were, of course, also underperforming nontraditional bond funds, with December losses as great as 8.71% and one-year drops of more than 26%. Without further ado, let's look at this month's best and worst:
Top Performers in December
The three best-performing nontraditional bond mutual funds in December were:
- Robinson Tax Advantaged Income Fund (MUTF:ROBAX)
- Parametric Absolute Return Fund (MUTF:EOAIX)
- Navigator Duration Neutral Bond Fund (MUTF:NDNAX)
ROBAX was December's top performer, posting gains of 2.53% and pushing its one-year returns to +5.34%. Those annual numbers were outdone by EOAIX, which finished second in December at +1.71% but ahead of ROBAX with 2015 gains of 6.65%. NDNAX, which was the month's third best performer in the category, notched monthly and annual gains of 1.58% and 2.38%, respectively.
Of the month's three top performers, only EOAIX had a three-year track record, and for the 36 months ending December 31, the fund returned an annualized -0.10%, compared to the category average of +0.14%. The fund's low three-year beta of 0.27 is attractive, but its -0.40% annualized alpha is not. Its three-year standard deviation of 5.12% is higher than the category average of 3.20%, indicating greater than average volatility. The fund's three-year Sharpe ratio was 0.00.
Worst Performers in December
The three worst-performing nontraditional bond mutual funds in December were:
- Highland Opportunistic Credit Fund (MUTF:HNRZX)
- Driehaus Select Credit Fund (MUTF:DRSLX)
- WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration ETF (NASDAQ:HYND)
HNRZX was easily December's worst performer, posting losses of 8.71% for the month and pushing its 2015 losses to an ugly 26.31%. The fund posted huge gains of 33.23% and 34.52% in 2012 and 2013, but then an 8.47% loss in 2014 ahead of its 2015 woes, which have sunk its three-year annualized returns into the red at -3.19%. The fund is extremely volatile, with a three-year standard deviation of 16.24%, and that and its -1.17 beta and -0.37% alpha combine to give it a three-year Sharpe ratio of -0.13.
DRSLX is another fund with minus signs across its returns table. The fund lost 3.92% in December and 7.13% in 2015, bringing its three-year annualized returns to -2.56%. It has extremely low (inverse) correlation to the benchmark, with a -0.07 three-year beta, but an attractive -2.43% three-year alpha. Its standard deviation of 4.48% is the lowest of the three funds with three-year track records reviewed this month, but still higher than the category average, and its three-year Sharpe ratio stood at -0.57.
Finally, HYND, the third-worst performer in December, posted a monthly loss of 3.82%. The fund launched too recently to have a three-year track record, but its one-year returns for 2015 came in at -5.66%.
Past performance does not necessarily predict future results.
Jason Seagraves and Meili Zeng contributed to this article.