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Many investors are trying to figure out what's next for bonds and how they fit in their portfolios.

Morningstar research shows that there may be a better way to build bond portfolios.

The team investigated how the sharp ratio can help investors balance risk and reward.

The data goes back more than 20 years.

Mace Kavara and Alec Lucas for Morning Star Research Services are here to explain what they found.

Mace is a strategist for fixed income strategies, and Alec is a director of manager research.

Thanks for being here, Alec and Mace.

What does a typical bond portfolio look like?

Can you give us an example, Alec?

Sure.

So three of the five biggest bond funds out there track a different version,

slightly different version of the US investment grade bond index. There's about $700 billion

in assets in those three funds. So they're pretty heavy in treasuries, 40 to 45% or so. Corporate

bonds, these are investment grade bonds and mortgage back securities.

And the key thing to keep in mind is that the typical bond portfolio, if you take those

as typical, it doesn't have any high yield, it doesn't have any leverage loans.

And some active managers will well invest in those asset classes and they'll vary their

allocations a bit, but they tend to track

the investment-grade bond index pretty closely. They'll vary their interest rate risk or duration.

They'll vary their high-yield allocation. But more or less, it's pretty similar. And bond funds

can be a wonderful source of ballast in a portfolio relative to equities. But the investment-grade

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