Is PPSAX a Strong Bond Fund Right Now?

Having trouble finding a Investment Grade Bond - Intermediate fund? Principal Spectrum Preferred and Capital Securities Income A (PPSAX) is a potential starting point. PPSAX carries a Zacks Mutual Fund Rank of 2 (Buy), which is based on various forecasting factors like size, cost, and past performance.

Objective

We classify PPSAX in the Investment Grade Bond - Intermediate category, an area rife with potential choices. Investment Grade Bond - Intermediate funds target the middle part of the curve, typically by investing in bonds that mature in more than three years but less than 15 years. At these maturity levels, fixed income instruments have medium duration risk--but they compensate investors with a respectable yield compared to shorter maturity options. Finally, a focus on investment grade ensures that these funds are safer, but yields will be lower than in the junk bond category.

History of Fund/Manager

Principal Financial Group is based in Des Moines, IA, and is the manager of PPSAX. Principal Spectrum Preferred and Capital Securities Income A debuted in October of 2005. Since then, PPSAX has accumulated assets of about $597.46 million, according to the most recently available information. The fund's current manager is a team of investment professionals.

Performance

Of course, investors look for strong performance in funds. This fund has delivered a 5-year annualized total return of 2.68%, and is in the bottom third among its category peers. But if you are looking for a shorter time frame, it is also worth looking at its 3-year annualized total return of 8.64%, which places it in the bottom third during this time-frame.

It is important to note that the product's returns may not reflect all its expenses. Any fees not reflected would lower the returns. Total returns do not reflect the fund's [%] sale charge. If sales charges were included, total returns would have been lower.

When looking at a fund's performance, it is also important to note the standard deviation of the returns. The lower the standard deviation, the less volatility the fund experiences. Over the past three years, PPSAX's standard deviation comes in at 4.29%, compared to the category average of 10.13%. The standard deviation of the fund over the past 5 years is 6.44% compared to the category average of 12.08%. This makes the fund less volatile than its peers over the past half-decade.

Bond Duration

Modified duration is a measure of a specific bond's interest rate sensitivity, and is an excellent way to judge how fixed income securities will respond to a shifting rate environment.

For those that believe interest rates will rise, this is an important factor to consider. PPSAX has a modified duration of 4.85, which suggests that the fund will decline 4.85% for every hundred-basis-point increase in interest rates.

Income

We must remember to consider the fund's average coupon, as income is traditionally a big reason for purchasing a fixed income security. This metric takes a look at the average payout by the fund in a given year. For example, this fund's average coupon of 7.28% means that a $10,000 investment should result in a yearly payout of $728.

For those seeking a strong level of current income, a higher coupon is typically good news. However, it could pose a reinvestment risk if rates are lower in the future when compared to the initial purchase date of the bond. Income is only one part of the bond picture, investors also need to consider risk relative to broad benchmarks.

Expenses

Costs are increasingly important for mutual fund investing, and particularly as competition heats up in this market. And all things being equal, a lower cost product will outperform its otherwise identical counterpart, so taking a closer look at these metrics is key for investors. In terms of fees, PPSAX is a load fund. It has an expense ratio of 1.05% compared to the category average of 0.95%. PPSAX is actually more expensive than its peers when you consider factors like cost.

This fund requires a minimum initial investment of $1,000, and each subsequent investment should be at least $100.

Fees charged by investment advisors have not been taken into consideration. Returns would be less if those were included.

Bottom Line

Overall, even with its comparatively weak performance, better downside risk, and higher fees, Principal Spectrum Preferred and Capital Securities Income A ( PPSAX ) has a high Zacks Mutual Fund rank, and therefore looks a good potential choice for investors right now.

This could just be the start of your research on PPSAX in the Investment Grade Bond - Intermediate category. Consider going to www.zacks.com/funds/mutual-funds for additional information about this fund, and all the others that we rank as well for additional information. If you are more of a stock investor, make sure to also check out our Zacks Rank, and our full suite of tools we have available for novice and professional investors alike.

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This article originally published on Zacks Investment Research (zacks.com).

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