Plotting a fixed-income strategy has gotten a lot tougher now that

we've experienced one of the worst bear markets for bonds in history. The yield curve has flattened, and many battered sectors are cheap, so you'll want to do more than stay in short-term bonds. But how long should you go? Should you venture into high-yields or stick with cash? Dip your toes into foreign bonds or stay home?

If you'd like a professional money manager to make such decisions for you, you may want to consider a flexible or "strategic" income fund. This relatively new class of funds, usually sold by brokers with a sales load, diversifies among government, high-yield corporate, global, and other types of debt. "The basic idea makes fabulous sense," in a bond world divided into "micro-cuts" such as short-term world income and adjustable-rate mortgage funds, says Eileen Makoff, an associate editor with Morningstar Inc.

Here, as with stocks, diversification cuts risk, since the performance of different sectors usually doesn't correspond. This wasn't the case in 1994 when fixed-income markets fell across the board. Flexible-fund sponsors had hoped portfolio managers would be able to sidestep some of the mayhem because they can adjust sector weightings to react to changing markets. But few were able to do this.

An exception is Ron Speaker, manager of Janus Flexible Income. He kept his funds' loss to 2.92% in 1994, while income funds (including those that also invest in high-dividend stocks) on average lost 4.51%. Speaker's strategies: raising cash, shortening maturities, and using futures to hedge against rising rates.

But some managers made things worse by shifting between sectors. Phoenix Multi-Sector Fixed Income, which invests in 10 sectors of the bond market and has a laudable 10.2% five-year average return, fell 6.77% last year. Managers had bought up emerging-market debt that seemed cheap only to see those markets crash in December.

Not all funds allow as much flexibility as Phoenix and Janus. Oppenheimer Strategic Income, Putnam Diversified Income, and Smith Barney Shearson Diversified Strategic Income have investment parameters that prevent the manager from loading up on any one sector. That didn't particularly help them in 1994. But in the long run, having a diversified bond portfolio in one fund still makes sense.

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