T. Rowe Price Short Term Bond Fund

U.S. News evaluated 111 Short-Term Bond Funds. Our list highlights the top-rated funds for long-term investors based on the ratings of leading fund industry researchers.

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Performance

The fund has returned 1.30 percent over the past year, 1.76 percent over the past three years, 2.93 percent over the past five years, and 2.97 percent over the past decade.

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Summary

For those who might be frustrated with near-zero money market yields, the T. Rowe Price Short-Term Bond Fund meets investors halfway by giving them the opportunity to earn higher income without exposing them to too much volatility.

As of May 03, 2013, the fund has assets totaling almost $6.74 billion invested in 722 different holdings. Its portfolio primarily consists of short-term domestic bonds, with a smaller portion of foreign bonds.

Although the fund lagged a bit behind its category and benchmark when the bond markets took a hit in 2008, manager Ted Wiese managed to keep the fund in the black while many other bond funds foundered. During the housing market meltdown and sub-prime mortgage crisis, Wiese says the fund escaped the massive losses some of its peers sustained because of extensive analysis and research. In 2010, the fund posted some fairly average returns, which Wiese says is a result of its more conservative approach. “We tend to perform well when risk is being shunned in the marketplace,” Wiese says. “Over the past 18 months, we’ve been more of a medium performer because risk-taking has been rewarded.”

Since mid-2008, the fund has loaded up on corporate bonds, which have shifted from about 28 percent of total assets to around 50 percent as of October 2010. “Corporate bonds were trading very cheaply because everyone was de-risking,” Wiese says. “My only regret is that I didn’t buy more.” However, he says the fund is at its “high-water mark” in exposure to corporate bonds and that he expects the allocation to decrease as he looks for opportunities in government agency mortgage-backed securities. The fund has returned 1.30 percent over the past year and 1.76 percent over the past three years.

According to Morningstar, Wiese took over in 1994 after stakes in mortgage derivatives caused the fund to falter a bit. Since then, the fund hasn’t lost money in any 12-month period starting in 2000. The fund has returned 2.93 percent over the past five years and 2.97 percent over the past decade.

Investment Strategy

Manager Ted Wiese likes to invest in a range of short-term bonds with durations between 1.8 and two years, and seeks to generate a high level of income while controlling price fluctuation. “We don’t take big interest-rate bets,” Wiese says. “I usually don’t like to take a position one way or the other unless the direction of interest rates is really clear.” He tends to overweight the fund in corporate, asset-backed, and mortgage-backed bonds, and underweights in treasuries and government agency-backed bonds. Although most of the fund’s assets are in high-quality bonds, Wiese is willing to take on some risk when he thinks the price is right, Morningstar says. This usually amounts to picks in mid-quality corporate bonds and international bonds.

At T. Rowe Price, separate committees evaluate the portfolio’s stakes in riskier assets such as derivatives. Wiese says the research that goes into “understanding what we own is paramount to our success.”

Role in Portfolio

Morningstar calls this fund a “supporting player.”

Management

Ted Wiese joined T. Rowe Price in 1984 and has been with the Short-Term Bond Fund since 1995. The firm’s bond team, which includes five portfolio managers and eight credit analysts, supports Wiese. According to Morningstar, Wiese keeps things simple and his experience has led him to “steer clear of esoteric structured bonds and derivatives that have tripped up others.”

Fees

T. Rowe Price Short Term Bond Fund has an expense ratio of 0.77 percent.

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Risk

Investing in high-yield bonds may subject the portfolio to greater credit and market risks. Interest-rate risks should be considered in any bond fund.

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Fund Opinions

The fund's Value Line Overall Rank, a measure of risk-adjusted performance and relative growth in fund returns, is 4 on a scale of 1 to 5, with 1 being the best and 5 the worst.

Value Line 2013-03-12

The fund's Value Line Growth Persistence rank, which awards funds that consistently outperform their broad universes, is 5 for one year, 5 for five years, and 5 for 10 years. Scores are on a 1 to 5 scale, with 1 being the best and 5 the worst.

Value Line 2013-03-12

The fund's Value Line Risk Rank, a measure of volatility, is 1 on a scale of 1 to 5, with 1 being the least volatile and 5 the most.

Value Line 2013-03-12

In the annual Lipper/Barron’s Fund Families Survey of 2009, T. Rowe Price family ranks 2 out of 61 fund families surveyed.

Lipper

Morningstar gives this fund a stewardship rating of A on a scale of A to F. “On most fronts, this fund is strong, benefiting from a top-rate investment culture, low fees, a manager with skin in the game, and a spotless regulatory history. With a more-independent board of directors, it would score even more highly.”

Morningstar

Morningstar gives this fund a stewardship rating of A on a scale of A to F. “On most fronts, this fund is strong, benefiting from a top-rate investment culture, low fees, a manager with skin in the game, and a spotless regulatory history. With a more-independent board of directors, it would score even more highly.”

Morningstar