Which of these managers will reclaim the title?
This past week, we've announced the final contenders for our Domestic-Stock and International-Stock Manager of the Year awards. Unlike those candidates, though, most of our finalists for the Fixed-Income award have actually made money for their shareholders this year.
It hasn't been easy. Many corners of the bond market--from the more daring arenas like high-yield corporate and emerging-markets debt to the staid municipal-bond sector--have suffered sizable losses in a historically trying year. Funds in the high-yield group have gotten slammed the hardest, with the category average down more than 30% this year (roughly tripling the category's 1990 losses when defaults on high-yield debt skyrocketed). But even the intermediate-term bond category is on pace to deliver its worst showing since late 1979/early 1980, dropping more than 7% so far this year, on average.
Against that backdrop, we've chosen to recognize bond managers who have thrived amid adversity. As in previous years, we don't just hand the award to the manager who has delivered the best returns over the past 12 months. If that were the case this year, we'd grab the nearest Treasury fund and call it a day. Not only are we singling out managers who've done a commendable job protecting shareholder capital in 2008's extremely tough market, we also look for those who ply durable strategies, earn good marks on stewardship, and boast a lengthy history of helping shareholders reach their investment goals in multiple market cycles.
Each of our four finalists for the 2008 Fixed-Income award has demonstrated worthiness under these criteria before--all have taken home the top prize at least once in the past. Here they are, in alphabetical order.
Bill Gross and Team
PIMCO Total Return Bond
Could this three-time Fixed-Income Manager of the Year nab a fourth crown in 2008? After notching a third win last year, Gross and crew's flagship charge has continued to show up much of the competition in this year's rough-and-tumble climate. A lot of what worked for the fund in 2007 has continued to work this year: The team avoided the worst trouble in the foundering nonagency mortgage and asset-backed sectors that have continued to plague some rivals, and the fund's core stash of agency-mortgage bonds and selective approach in the beleaguered corporate arena have helped it soldier through market turbulence better than most. While maintaining the fund's high-quality theme, Gross has opportunistically taken advantage of bargains in areas as diverse as municipal bonds, the senior debt of large financial firms, and select emerging-markets bonds.
Gross' acumen notwithstanding, PIMCO's formidable research capabilities across bond sectors go a long way toward explaining why this fund continues to find itself in the right place at the right time. Although the fund's girth is not without its challenges, it has richly rewarded many shareholders over the long haul.
Jeffrey Gundlach, Philip Barach, and team
TCW Total Return Bond
It's tough to be unimpressed by Gundlach and team's knack for delivering consistently topnotch results while working with a more limited tool kit than his intermediate-term bond rivals. That's not to suggest that the execution here is in any way simplistic. While Gundlach sticks primarily with mortgage bonds, his goal is to make the fund competitive with more diversified core bond offerings by utilizing his team's considerable mortgage expertise. Over time, he's done just that. Taking a look at the fund's performance in recent years, his portfolio of government agency-backed mortgage bonds topped the charts from 2004 through 2006 (we awarded him Manager of the Year in 2006), even as more credit-sensitive fare trounced higher-quality sectors over that stretch. But with mortgage-backed securities remaining at the center of the market's maelstrom since mid-2007, his top-quartile category ranking this year (albeit with a modest gain of less than 1%) is equally astounding, particularly as he's steadily moved just under half of the fund's assets into nonagency mortgage fare at fire-sale prices this year, an area of the market that has tripped up other managers.
The fund's rock-bottom price tag, which was slashed in 2003, is another trait that gives it an enduring edge, helping ensure that more of the fund's returns pass directly to shareholders year in and year out.
Bob Rodriguez, Tom Atteberry, and team
FPA New Income
FPA New Income's recent success has been years in the making. Rodriguez and Atteberry will go to great lengths to preserve shareholder capital, even if it means leaving money on the table in times when the market appears deceptively ebullient. To that end, they began warning investors about the prevalence of careless lending practices in the mortgage arena and the increasingly precarious condition of bank balance sheets several years ago. New Income's highly cautious portfolio of straight agency debentures, agency mortgage-backed securities, and good old-fashioned cash has been the cure to the market's ills this year, helping the fund deliver a chart-topping 4.0% gain for the year ended Dec. 15. Remarkably, the fund hasn't suffered a calendar-year loss since Rodriguez took charge in 1984, and its long-term record is also strong.
The investor-first culture at FPA is another reason we admire this fund. For example, Rodriguez and company deserve a gold star for their frequent and detailed communication with shareholders over the years.
Christine Thompson, Mark Sommer, and Jamie Pagliocco
Fidelity Municipal Income
Bond insurer downgrades, auction-rate market failures, and a wave of selling by leveraged muni investors may have weighed on the tax-exempt market in the first half of 2008. But those trials were just a warm-up for the main event: September's financial-sector upheaval pulled the rug out from underneath the muni market, and prices on lower-quality and less frequently traded securities suffered the most. Granted, Fidelity's distinguished municipal-bond team wasn't able to spin straw into gold in this environment, but its uncompromising attention to risk has made the firm's muni lineup relative stalwarts. Ten out of Fidelity's 17 tax-exempt offerings have landed in the top quartile, and all but one rank solidly in the top half of their respective categories. The funds' long-term results are even more striking: Over the past 10 years, six of the funds have beaten all of their rivals, while all but one rank in their category's top decile.
The groundwork for the funds' recent relative success was laid in 2006, when the managers were nonplused by the low levels of additional yield offered by midgrade bonds and dicier sectors such as tobacco-settlement issues. Their penchant for uncovering bonds that benefit from advance-refunding activity also put them in the catbird seat at the start of this year, giving the managers a slew of highly liquid, Treasury-backed issues to trade in for better values. We think that this team is an easy favorite in any environment, though. The trio of managers, led by Thompson (who took home Manager of the Year honors in 2003), brings a complementary set of skills to the table: Thompson has a background in credit research, Sommer in quantitative research, and Pagliocco in trading. Morningstar fund analysts who've visited the team's Merrimack, N.H., headquarters have come away impressed with the seamless communication and collaboration among these three cornerstones of the team's process. Although the funds will undoubtedly see better years in absolute terms, we think that their relative results in this difficult year make the team a strong contender.
The 2008 Fund Manager of the Year award winners will be announced on Morningstar and CNBC on Tuesday morning, Jan. 6, 2009.
Miriam Sjoblom is an analyst at Morningstar.