Latinos In America

By MICHAEL A. POLLOCK

As the financial crisis heads into its third year, investors in bond funds are facing some difficult choices.

Investors usually turn to these funds for safety. But bond funds are facing a host of pressures that are driving down returns, raising long-term risk and making it tougher to settle on the right investment strategy.

Take funds that focus on long-term Treasurys. These have often been an easy choice for a safe haven. But after frenzied buying of Treasurys last fall when the financial crisis became acute, prices have fallen as broader fears have eased and some of that money has come back out of the government-bond market. There’s also concern about the huge amount of debt the Treasury Department must sell to finance higher federal spending.

The result? Funds focused on these bonds are down 13% this year, according to Morningstar Inc. “Treasurys, which are considered the risk-free asset class, probably are the riskiest asset class right now” among fixed-income options, says Robert Gahagan, team leader for U.S. taxable bond investments at American Century Investment Management Inc.

As for municipal-bond funds, lots of states and localities are strapped for cash, which raises the specter of defaults and makes their bonds a riskier investment. Likewise, corporate-bond defaults are high and still rising.

Even money-market funds are under pressure these days. The older securities that such funds bought when rates were higher are maturing, and those available now pay paltry yields because the Federal Reserve is keeping short-term rates low to spur economic growth. So, even the highest-yielding funds have annualized yields of less than 1%.

In this tough environment, many investors are steering for the middle of the road. Instead of looking for long-term-bond funds which could get slammed if rates rise in the near term they’re buying vehicles that invest in intermediate-maturity bonds. These funds also typically hold a mix of government, mortgage and investment-grade corporate bonds, which spreads risk around. Even cautious intermediate-bond funds yield about 4%, handily beating rates available on money-market funds.

“It’s a good idea for investors to have exposure to nongovernment sectors, like corporate bonds, that offer a bit more of a yield cushion and diversification,” says Miriam Sjoblom, an analyst at Morningstar.

So, what should bond-fund investors be watching out for these days? Here are five key pointers.

Watch Out for Defaults

If you head into a bond fund, pay close attention to the types of bonds it holds. Some of the most popular choices corporate bonds and munis carry greater risks these days.

With corporate bonds, it’s probably better to avoid funds that have loaded up on speculative-grade, or “junk,” issues those rated at or below Ba1 by Moody’s or double-B-plus by Standard & Poor’s. Last year, some intermediate-bond funds that owned a lot of riskier securities were down 25% or more on panic selling.

And now? Moody’s Investors Service says by the end of June, 11% of some 1,500 U.S. speculative-grade corporate issuers it tracks had defaulted on debt during the previous 12 months, up from 8% at the end of March. Moody’s expects that rate to reach about 13% by year-end and then to start dropping.

Check a fund’s prospectus for its policies about investing in riskier bonds and check shareholder reports or resources such as Morningstar.com for a fund’s recent exposure. But even investment-grade corporate bonds can suffer ratings downgrades, and they can lose value in trading just on speculation that an issuer is running into difficulty. So, you might look for bond funds that make a point of investing very defensively in these types of securities.

For instance, RidgeWorth Intermediate Bond recently held around 97% of its $1.3 billion portfolio in bonds rated investment grade. The fund is avoiding financial-company bonds while buying utility, consumer-staple and pharmaceutical issues, says RidgeWorth Investments fund manager Jim Keegan. Such choices reflect the view of Mr. Keegan and his colleagues that the U.S. economy will remain weak for an extended period.

Meanwhile, recognize there’s also more credit risk than usual in the municipal-bond market, where defaults historically have been very rare. Recently, as California lawmakers deadlocked over how to close a $24 billion state budget gap, ratings agencies cut the state’s general-obligation-bond rating the credit rating of bonds backed by the full faith and credit of the state and ratings for other bonds issued by the state and related entities.

Muni-bond specialists doubt that any state actually will default but even the threat of a downgrade could cause a state’s bonds to trade lower in the market and hurt the net asset value of a muni-bond fund. Moreover, big budget cuts at the state level will pressure finances of local governments possibly raising the specter of defaults and hurting their bonds on the market.

Limit Your Rate Risk

As the economy eventually strengthens, investors may need to start worrying about interest-rate risk the threat that rising rates will push down the prices of existing bonds.

Generally, the longer the maturities a bond fund owns, the more sensitive it is to a broad move in yields. This sensitivity, called duration, is a measure based on a portfolio’s average maturity and fixed interest rate. By checking a fund’s duration which fund firms disclose periodically with portfolio holdings you can see how any broad rise in yields might affect a fund’s value.

Multiply the duration figure by a given percentage-point change in yields. Worried that yields are going to rise by one percentage point? A portfolio with a duration of 10 could lose about 10% of its principal value in that scenario.

Given the risk, it may be smart to shift to a shorter-maturity bond fund, even though that will generally produce a lower yield. Many managers of taxable intermediate-term-bond funds keep duration at around four years, which they believe enables them to get good yields without taking a great deal of rate risk. Stephen Mahoney, who manages Glenmede Core Fixed Income, recently has been keeping duration modestly above four.

If four years is too much for your risk tolerance, you can look for even lower durations. One fund that fits the bill, and is a pick of Morningstar’s Ms. Sjoblom, is FPA New Income. It returned 4.3% last year, and its duration recently stood at 1.1 years.

Interest-rate risk is a particular concern for holders of munis, which often are sold in maturities as long as 30 years. As a result, muni-fund durations often exceed those of taxable-bond funds. “The typical municipal fund may have a 20-year average maturity and a 15-year duration,” says Warren Pierson, who helps manage Baird Intermediate Municipal Bond. “So investors in such a fund potentially could be looking at a 15% loss of principal” if interest rates rise one percentage point.

The Baird fund invests in shorter maturities and has a duration of less than five. It ranks in the top 2% of Morningstar’s national intermediate-term municipal category for five years and last year posted a total return of 6%.

Hedge fund manager David Kabiller talks with SmartMoney reporter Janet Paskin about why more hedge fund managers are moving into mutual funds and how they are applying their strategies.

Consider a Passive Strategy

Last year, most actively managed bond funds performed worse than bond-market benchmarks such as the Barclays Capital U.S. Aggregate Bond Index. The trouble: They had lower weightings in government bonds than the indexes did, or they were trying to boost yields through positions in complex, difficult-to-trade securities.

So, are investors better off opting for an open-end fund or exchange-traded fund that tracks an index? Indexed portfolios eliminate any possibility that a manager might bet the ranch on a risky strategy, and they offer much greater transparency. Indexed portfolios also charge relatively low management expenses, leaving more of what they earn for investors.

However, some that are based on smaller baskets of securities could suffer more proportionately if just a few of the bonds in the basket run into trouble.

One ETF that offers considerable diversification as well as low interest-rate risk is the iShares Barclays 1-3 Year Credit fund. Its portfolio comprises 425 securities with an average credit rating of single-A and a duration of less than two, though some investors may not like the fact that its holdings include a lot of financial institutions. A 6.29% gain in net asset value in the first half of this year put the fund in the top tier of Morningstar’s short-term-bond fund category for that period.

Have an Inflation Hedge

Should you worry about inflation? It depends on your time horizon. With so much slack in the economy, few economists see near-term risk. And funds that hedge against inflation were slammed last year as investors fretted more about deflation.

But the government’s stimulus efforts create potential for inflation to flare eventually. And despite its mission to limit inflation, the Federal Reserve will face strong political pressure to keep stoking economic growth as long as the economy is weak, says Ken Volpert, head of the taxable-bond unit at fund giant Vanguard Group Inc.

One option is funds that invest in Treasury inflation-protected securities, or TIPS, whose principal amount is adjusted for changes in the consumer-price index. A low-fee option is Vanguard Inflation-Protected Securities, which basically just owns TIPS. Morningstar also gives high marks to Harbor Real Return, which owns TIPS and some other types of bonds, and Pimco CommodityRealReturn Strategy, which owns TIPS but also uses derivatives to capture moves in commodities markets.

Don’t Try to Time the Market

As is true for all markets, the outlook for bonds is clouded by a great deal of uncertainty. Yields can move significantly as market sentiment shifts about the prognosis for the economy, interest rates and inflation. “No matter what move they make, investors should brace themselves for more volatility ahead as the market’s attitude toward risk continues to fluctuate,” says Ms. Sjoblom of Morningstar.

Don’t assume, for instance, that you’ll be savvy enough to anticipate a broad climb in interest rates and thus be able to jump out of a long-term-bond fund before it suffers a significant decline in net asset value.

Rather than making big changes in your portfolio all at once, you might shift smaller sums at regular intervals, to reduce the risk of making a poorly timed investment. Most fund sponsors have Web sites that enable you to manage your positions. You can use them to arrange periodic automatic transfers of money into one or more funds from a bank account.

–Mr. Pollock is a special writer for Dow Jones Newswires in New York. He can be reached at michael.pollock@dowjones.com.

By DAMIAN PALETTA And DIONNE SEARCEY

The backlog of applications for disability benefits is so big the Social Security Administration has a special code—DXDI—for appeals dismissed because the applicant died waiting. Since 2005, the agency has made 15,043 DXDI designations.

One person who died waiting was Dexter E. Penny of District Heights, Md., who applied for disability benefits in February 2009 after being diagnosed with colon cancer. His initial application was denied. Then his first appeal was denied on the grounds that he didn’t provide enough medical records.

Diane Penny

Dexter Penny, who died last year.

Mr. Penny, a mason, approached the Maryland Legal Aid Bureau for help a year after his first application. He couldn’t understand why terminal cancer wouldn’t qualify him for benefits, says his sister, Diane Penny.

Kate Lang, his lawyer, called four hospitals seeking additional records. Mr. Penny’s condition worsened. By September 2010, he was told he had stage-four cancer. Mr. Penny, 50 years old, was nearly broke and dying in the hospital and the agency wanted more accurate documentation to determine whether he was able to work, according to his sister.

On Dec. 15, 2010, the agency informed him by letter that he had been granted benefits. Mr. Penny had died nine days earlier. The letter arrived the day of his funeral. On Jan. 31, the government sent him another letter saying his benefits had been revoked because he hadn’t responded to the agency’s questions in a timely manner.

Applications for disability benefits are rising sharply because of high unemployment, an aging population and a combination of mismanagement and potential fraud within the system. About 3.3 million people sought benefits in 2011, and at the end of September a record 771,318 were waiting to have their cases heard on appeal by administrative law judges, according to the latest government data.

Both U.S. lawmakers and disability groups have complained about the long waits. The Social Security Administration has set up a program to let some applicants jump to the front of the line. It also has expanded the number of diseases and disorders that merit an immediate review, which include acute leukemia and pancreatic cancer, to 113, from 100.

These moves have reduced the number of applicants dying in line each year, by 20% from its 2009 peak. The backlog, however, has continued to rise.

On Nov. 28, 2007, Phillip Barnes, of Indian Head, Md., was robbed and shot four times. At the time, he was a manager at a hotel in Maryland. He says he couldn’t return to work because of his injuries, and that he has been trying to get benefits for nearly four years.

The shooting shattered bones in his left forearm, requiring a plate to be inserted. A second bullet struck him in the left side, piercing his spleen and hitting his right kidney. He had a stent inserted into his kidney that is prone to infections and must be replaced every year.

Another bullet struck him in the left buttock. A fourth struck him near the center of his lower back—an injury that still causes him pain, he says. Mr. Barnes says he also is diabetic and suffers from depression.

While waiting for a decision about benefits, his cellphone was shut off. His then-girlfriend had co-signed for a truck that was repossessed, and she is stuck paying $500 a month to settle that bill, he says.

He receives $185 a month from Maryland social services, and he gets food stamps. He pays his aunt $100 in monthly rent.

“There are other people worse than me still fighting for disability,” he says. “But I think I deserve it.”

By CHRISTINA PASSARIELLO

Switzerland has 26 cantons and four languages, but one dish unites everyone: fondue. Bread chunks dipped in a pot of hot cheese has been a national dish since the 1930s. Christina Passariello has details on The News Hub.

Size is not Switzerland’s main asset. If the country were a U.S. state, it would rank 42nd in size, right between West Virginia and Maryland. The drive between its two biggest cities, Zurich in the northeast and Geneva in the southwest corner, takes just three picturesque hours, past church steeples, rolling green hills and thousands of long-lashed cows. Homogeneity doesn’t rank high, either. A melting pot of cultures, Switzerland has 26 cantons and four languages jammed into its territory.

But there are symbols that unite the Swiss—chocolate, watches, geopolitical neutrality and an astronomically priced currency. Chiefly, however, there is fondue. Bread chunks dipped in a pot of hot cheese, served in army barracks and at Sunday family dinners, has literally been a national dish since the 1930s.

It’s a pretty appealing dish to rally around—already excellent cheese turned to gooey, molten goodness over a burner or open flame. There’s a low-stakes challenge in spearing bits of crusty bread on sticks and swirling them into the mixture without losing the bounty. It’s one of the world’s great communal meals.

“It is said that eating from the same caquelon—or fondue pot—establishes friendships,” says Verena Lüthi, who runs the hillside chalet restaurant Auberge de Mont-Cornu, near Switzerland’s northern border with France, with her husband

And while the Swiss eat it year-round, winter is a truly ideal time for fondue, whether you’re just off the ski slopes or dining out in the city.

Fondue means “melted” in French. Ever since people began preserving milk as cheese thousands of years ago, they have been melting it, says Isabelle Raboud-Schüle, curator at the Musée Gruérien, a regional culture museum in the fondue-heartland town of Bulle in the Fribourg region. The first written recipes for dishes resembling modern fondue date back to 18th-century French and Belgian cookbooks, but they called for imported Gruyère cheese, she adds, thereby making fondue Swiss. (Two variations—chocolate fondue and beef fondue—are attributed to a Swiss chef in New York in the 1950s.)

Melting Pots

Where to find exceptional fondue around the U.S.

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Sonnenalp Resort of Vail

Swiss Chalet in Vail, Colo.

Swiss Chalet | Vail, Colo.

Where better to indulge in a pot of molten cheese than beside the wintry slopes of a ski resort—in this case, Sonnenalp Resort of Vail? Located in the heart of Vail Village, Swiss Chalet’s Alpine-style décor and an array of old-style fondues and raclettes transport you straight across the Atlantic.

20 Vail Rd., sonnenalp.com

Café Select | New York

In the winter months, the grotto-like back room of Serge Becker’s sceney Swiss eatery is dedicated to a special fondue menu featuring four different cheese versions, plus raclette. For a fresh take, try the South of the Alps fondue with fresh and sun-dried tomatoes and olives.

212 Lafayette St., cafeselectnyc.com

Geja’s Café | Chicago

This Lincoln Park stalwart has been in business since 1965, and is well known to locals for its extensive wine list, dimly lit romantic ambience and the city’s purported best fondue. Geja’s serves just one, classic Gruyère fondue, available as a main meal or as a prelude to a hot oil fondue course featuring lobster, beef and a variety of other meats of your choosing.

340 W. Armitage Ave., gejascafe.com

The Little Dipper | Wilmington, N.C.

Roberta Allen/Alamy

Melt in San Francisco

Locals are in love with the convivial atmosphere—and signature cheddar ale fondue, prepared tableside—at this popular restaurant just steps from Cape Fear. For the cheese-averse, the menu features a large variety of non-fondue items as well.

138 S. Front St., littledipperfondue.com

Melt | San Francisco

The fondue at this quirky neighborhood café in North Beach garners praise for its beautifully thick, elastic consistency. Choose from Classic Neufchatel, Welsh Rarebit, Scrumpy Welsh Rarebit and Stout Rarebit versions prepared in two sizes. Most evenings, wall-projected films, open-mic nights or live music round out the experience.

700 Columbus Ave., melt-cafe.com

—Elizabeth Gunnison

In the 1930s, Switzerland wanted to promote cheese consumption at home. Through the distribution of fondue recipes, the Swiss Cheese Union advocated that the dish be eaten as often as possible, says Ms. Raboud-Schüle. It also happened to be a handy way to use up leftover scraps of bread and cheese.

Forget about that neutrality thing, though. Each region in Switzerland claims to have the best fondue formula based on local varieties of the two essential ingredients, cheese and wine, as well as other elements that get thrown in the mix. Around Fribourg, an area in western Switzerland that rises between two big lakes, I ate a pure Vacherin fondue, instead of the mix of cheeses that is common. As if a half pound of gooey cheese per person weren’t rich enough, near Neuchâtel it was served with a mountain of fresh cream on top. In the Valais region, an arc that runs along the French and Italian borders and home to the Matterhorn, the local fondue variety calls for a tomato coulis.

The Gruyères version has become dominant in recent decades. Often referred to as a moitié-moitié, or half-and-half, it mixes Gruyère and Vacherin cheeses (not necessarily in a 50-50 proportion) with white wine and garlic. Though it’s most common in the Fribourg region around the medieval town of Gruyères, the dish bubbles up in Geneva and Zurich, where transplants from Fribourg have set up shop.

Still, many chefs are playing with the classic formula. Christophe Demierre, who runs a molecular-cuisine cooking school from his home kitchen in the Fribourg region, makes fondue as a mousse and a powder that are meant to be eaten individually. “There’s still a sense of sharing because it becomes a conversation topic,” he says from his kitchen.

Carlo Crisci, who runs two-star Michelin restaurant Le Cerf, north of Lausanne, cooked a cold fondue of small cheese balls in a hot potato soup for a special event. But he doesn’t serve his modern fondue at the restaurant. “You can’t really serve fondue in an elegant restaurant” because of the smell, he says. Meanwhile, Hervé This, a molecular-gastronomy academic, recommends adding a pinch of citric acid to emulsify the ingredients in fondue—a step that traditionalists balk at.

As with any dish that has such cultural significance, there are plenty of rules that come with eating fondue. The Swiss only condone drinking white wine or hot tea with their melted cheese—anything else is said to create an indigestible ball of cheese in the stomach. (The most egregious offense is drinking Coke or beer, but even water is frowned upon, Ms. Raboud-Schüle says.) Purists don’t approve of ordering a salad for some greens with all that dairy. But cured meats are okay. And whoever loses their bread in the fondue pot buys a round of drinks for the table.

After a few days of eating fondue in five Swiss cantons, I was ready to break all the rules. I wanted red wine. I wanted vegetables. But the upside was, I became a master at spotting standout fondue. Start with the bread: It should be crusty and flavorful. The cheese shouldn’t be runny, but should envelop the bread. There should be a hint of wine in the mix, but the alcohol should not leave an aftertaste. Neither should the garlic.

The Tourist Treasure | Le Chalet

Fondue restaurants line the main cobblestone street in the medieval town of Gruyères, between Berne and Lausanne. Look to the top of the hill for Le Chalet and its quintessential wooden dining room. (Opt for the cozier upper floor, under the dark beams, rather than the lighter ground floor.) The moitié-moitié is a classic, served with potatoes and thick slices of bread. (At 29.50 francs, or about $30, it is also one of the most expensive, but that’s the price of being a tourist.) Rue du Bourg, Gruyères, chalet-gruyeres.ch

The Crowd-Pleaser | Café Tivoli

Smack in the heart of fondue’s Fribourg heartland, Café Tivoli is a favorite of local chefs. But this isn’t hoity dining. Big groups gather around steaming caquelons for hearty fondue made with perfectly aged cheese. There isn’t a menu offered in the wood-paneled dining room—you just chose between a moitié-moitié and a pure Vacherin. The latter is served warm, not hot—because the cheese is so rich, the oil separates from cream at high temperatures—and comes with potatoes for a dish that resembles raclette. Cafe Tivoli is currently in the hands of the fourth generation of the Colliard family—meaning they’ve been serving fondue for at least 80 years, going back to when Switzerland was first promoting it as a national dish. Place d’Armes 18, Châtel-St-Denis, cafetivoli.ch

The Urban Transplant | Fribourger Fondue Stübli

Denise Ernst, whose parents moved the family from Fribourg to the big city, set up her own restaurant in a gourmet ghetto of Zurich 36 years ago. Nearby, there are reputable pizza joints, high-end Italian restaurants and a Japanese noodle bar. For classic Swiss cuisine, try Ms. Ernst’s moitié-moitié. Five cheeses go into it: two kinds of Gruyère and three kinds of Vacherin, ranging from young to aged, to get the right mix of flavors. For a sweet treat, ask for pears and pineapple to dip into the melted cheese. Rotwandstrasse 38, Zurich, fondue-stuben.ch

The Refined Rendition | Auberge de Mont-Cornu

This charming chalet in the hills above La Chaux-de-Fonds in northwestern Switzerland is straight out of “Heidi.” The house fondue is nuanced, using three kinds of Neuchâtel cheese (Jura, Vacherin and Chaux d’Abel) topped with savory whipped cream and cracked black pepper. The restaurant, in the Luthi family’s 400-year-old house, also serves local meats and Swiss specialties such as rosti, a fried potato pancake. If it’s warm, you can have your fondue in the garden overlooking cow and horse pastures. Closed until April, 2012. Mont-Cornu 116, La Chaux-de-Fonds

The Neighborhood Joint | Au Vieux Carouge

Located in a neighborhood of gingerbread-like houses and gourmet stores on the outskirts of Geneva, Au Vieux Carouge was founded by a husband-and-wife transplant from Valais 28 years ago. It is what a diner is to hamburgers—a down-home spot filled with locals who crowd around orange caquelons. The menu makes some concessions to modern versions of fondue: The Marseillaise is spiced with herbs and the Neu-Neu has pasta mixed in. The tomato version—the owner’s favorite—is made with a homemade coulis. Rue Jacques-Dalphin 27, Carouge, 22-342-6498

The Quirky Canteen | Buvette des Bains

This lakeside Geneva eatery is housed in a converted public bathhouse that dates to the 1930s, with wood-burning stoves to keep diners warm. Don’t expect white tablecloths—here you order your fondue outside and leave your name. A few minutes later, someone will bring you a bubbling pot to one of the long communal tables. They use local sparkling white wine instead of still wine, but it’s actually a pinch of baking soda that keeps the dish so fluffy. The tools are more basic than at most places—regular forks stand in for long fondue utensils—but the crowds don’t seem to care. 30 quai du Mont-Blanc, Geneva, buvettedesbains.ch

Write to Christina Passariello at christina.passariello@wsj.com