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Bond investing doesn't have an exciting reputation - unless you add a financial crisis, devastating global recession and experimental central bank moves to the mix.

That's right, the past few years have pushed bond investors into the spotlight as they have wrestled with the sort of volatility and money-making opportunities that could make most equity investors blush.

Terry Carr, manager of the Manulife Corporate Bond Fund, has succeeded better than most of his peers. His $838-million fund, which is split between investment grade corporate bonds and wilder high-yield issues from Canada, the United States and elsewhere, is top-ranked by Lipper.

It has returned 8.3 per cent over the past 12 months, to the end of April. The returns over the past several years have been equally inspiring. In 2009, it returned an amazing 25.2 per cent. And when the stock market was melting down in 2008, cutting major indexes in half, the fund turned in a comparatively slim loss of just 8.3 per cent.

In other words, good things can happen when you embrace higher-yielding bonds, despite the higher risk.

"If you're prudent and careful in investing in corporate debt, that extra yield is more than adequate compensation," Mr. Carr said.

The way he sees things, if you do your homework and make the right decisions on where a company or sector is going, the returns on bonds are far more predictable than the returns on stocks.

Stock returns, after all, are largely based on valuations that can shift with investor sentiment. But if an investor holds a bond to maturity, and the bond issuer doesn't default, he or she will get back the principal along with the regular interest payments.

"We can forecast returns, make those value decisions between investment grade and high-yield, with more certainty than a group of equity investors trying to determine the pathway of common stocks," Mr. Carr said. "Because we know that at the end of the day, if they don't default, we're going to get par at 2015 or 2018 or 2020 or whenever."

Equity-like Rates of Return

High-yield bonds are riskier investments than, say, rock-solid government bonds because they are rated below investment grade by credit rating agencies. That's why Mr. Carr allocates only part of his fund to them.

When he sees opportunities, the mix can lean as much as 60 per cent in favour of high-yield bonds or as low as 30 per cent. Right now, high-yield bonds represent about 53 per cent of the fund's assets.

Despite that relatively high exposure, the default rate is low. And even when bond issuers do default, the fund can recover a large chunk of its initial investment, reducing the loss rate to 1 or 1.5 per cent in the long run. Therefore, the downside risk of default pales next to the upside of strong returns generated by high yield.

"So you're getting almost equity-like rates of return but with more certainty," Mr. Carr said.

During the financial crisis, bond yields surged with the widely held belief among investors that default rates would rise as companies struggled to make ends meet (as yields rise, bond prices fall).

Look at Cash Flow

At the worst point during the crisis, the difference in yield between high-yielding corporate bonds and safe U.S. Treasury bonds was as much as 20 percentage points, up from just 3 percentage points before the crisis - giving investors like Mr. Carr a once-in-a-lifetime opportunity to buy bonds at a steep discount.

He stuck to his approach of comparing issuers' debt levels to their cash flows, looking for bonds that were valued too low next to their inherent value.

The so-called "spread" between high-yield bonds and Treasury bonds has shrunk to about 4.9 percentage points, at the same time that economists are warning that central banks will be raising interest rates sooner rather than later after reducing them to record lows during the crisis. Rising rates can harm bond prices.

Mr. Carr has responded by bringing down his exposure to high-yield bonds slightly, to 53 per cent his fund's assets from 57 per cent. However, he expects that central banks will remain cautious on the economic recovery, and won't raise rates too quickly given a backdrop of tame inflation.

"We see a drift up in interest rates gradually, which will hurt government bond returns most directly," he said. "But corporate debt is somewhat cushioned by that, because as economies improve and interest rates gradually rise, spreads may tighten further."

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