Q: I wonder why you prefer Investment Grade Bond fund to Total Bond in the Income and Preservation portfolio. Until there is some real sign of inflation, isn’t the yield worth the risk?

-- Bill R., via email

A: Dear Bill:

As you know we like Total Bond – it is rated Buy – as well as Investment Grade. The risk to Total Bond (versus Investment Grade) isn’t inflation but a weakening in the economy. Total Bond has almost 17% in below investment grade “junk” bonds compared to about 5% for Investment Grade. We have loved ‘junk’ bonds this year because at the end of 2008 their yield premium over Treasuries was ridiculously high. But after lights-out returns, the premium is now fairly close to historical averages. Should the economy disappoint here, they would get hurt more than investment grade bonds. We still like them now, but the risks are certainly elevated and we feel safer in the I&P model with a little less risk.

November 14, 2009
Global Commodity Stock

Q: I don't see any information in the Guide or any commentary (other than listed as "buy" in the scorecard) about Global Commodity Stock. Why is it not in the Guide and where can I get info about it.

-- Frank S., via email

A: Dear Frank:

We intend to add it to the Guide before the end of the year. It needs to be programmed.

The fund invests in the stocks of firms in the commodity sector (not in commodities themselves as Strategic Real Return does with a portion of its assets through bonds linked to a commodity index) with roughly a third of the fund spread across three areas -- energy (Chevron, ExxonMobil etc.) agriculture (mostly fertilizer stocks such as Monsanto, Potash) and metals and miners (BHP Billiton, Rio Tinto).

About half of the portfolio is in the U.S. and half overseas with UK next at 14%. It is reasonably diversified (within the commodity sector!) with over 250 holdings and a little more than a quarter of assets in its top 10.

April 9, 2009
Monthly Income From TIPS Disappear

Q: Inflation-Protected Bond [ticker: FINPX] hasn't paid a dividend for the last few months. This seems strange since other bond funds are paying. (For example, I also own Investment Grade.) Do you have any thoughts on this?

-- Art P., via the Internet

A: Dear Art:

Thanks for a great question! Fidelity's Inflation-Protected Bond fund and others run by competitors have effectively suspended their monthly dividends because inflation has all but disappeared from the economy. Let's take a step back.

Inflation-Protected Bond invests in Treasury-Inflation Protected Securities (TIPS). Credit-wise, TIPS are as safe as any other Treasury. But they differ from ordinary Treasuries in a few ways. The most important is that their principal value is adjusted up or down twice annually based on the Consumer Price Index, which measures inflation. With coupon (interest) rates on TIPS already low, inflation declining, and accounting for expenses (standing at 0.45%), the income that Inflation-Protected pays in the form of dividends evaporates.

On the other hand, this fund's stated objective is not income, but rather total return. Inflation-Protected Bond rose 4.8% during the first quarter - far more than any other taxable bond fund at Fidelity. So while have not recently received a monthly income distribution, you've made plenty of money. (Sell some appreciated shares if you need the income.)

Finally, if you find an inflation-linked bond fund somewhere that is distributing income, there's only two ways it could be doing that right now: 1. It owns something other than TIPS, and; 2. It's distributing income that it really doesn't have. In that case, it will eventually have to re-classify that income as a capital gains distribution.