From the December 2005 issue of Investment Advisor • Subscribe!

Taking the Middle Way

As the Federal Reserve commits to raising interest rates, the environment for bonds will likely become bleak after nearly a half decade of low rates and strong gains.

Still, intermediate bonds (i.e., fixed-income securities that typically mature between three and ten years) have delivered generally good returns, as their sensitivity to interest rate risks is between short- and long-term bonds.

One of the best performers amongst intermediate bond funds, the $414.5-million Delaware Corporate Bond Fund (DGCIX), typically invests in corporate bonds rated BBB and above by Standard & Poor's.

As of October 31, portfolio manager Ryan K. Brist kept an average credit quality of A, (with BBB-rated securities accounting for the largest portion of assets, at 34.1%), an average effective maturity of 9.7 years, an average coupon of 6.17%, and an average effective duration of 5.8 years.

The portfolio is highly diversified by sector. Financials represent the largest slice (25.13%), followed by smaller allocations in eight other industries. The portfolio comprises a total of 354 securities issued by companies located in 20 countries.

Another consistently strong long-term performer, the $3.72-billion Calvert Income Fund (CINCX), seeks relative value to earn incremental income. Portfolio managers Gregory Habeeb and Matt Nottingham perform in-depth credit analysis to identify bonds with attractive price-appreciation potential, and specialize in uncovering issues with complex and unusual structures.

The fund typically keeps at least 65% of net assets in investment-grade debt securities, with the remaining 35% in non-investment grade issues. As of September 30, the fund had an average credit quality of AA- (with AAA-rated securities representing 29% of assets), an average effective maturity of 8.68 years, and an average duration of 3.94 years.

Habeeb attributed the fund's recent outperformance to maintaining a short-duration, high-quality bias.--Palash R. Ghosh

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