PIMCO and Vanguard Top Taxable-Bond Fund Rankings

Sometimes it helps to step back and see the forest for the trees. I like to look at asset-weighted performance by fund family for a couple of reasons. While three-year returns on a single fund are only of little value they are of more value when looking at many more observations in the form of the firmwide performance. It helps to provide some sense of firmwide strengths and weaknesses in an asset class as well as any biases that play out across a bunch of fund companies.

Let's take a look at the 10 largest taxable-bond-fund companies. I examined three-year relative performance rankings for the period ended Feb. 29, 2008, and Feb. 28, 2005. I weighted that performance based on asset size at the beginning of the period in order to make sure that it isn't biased by flows that tend to follow strong performers. I also excluded institutional shares because their low costs don't represent what the typical individual investor can get. Finally, I'd note that in our percentile rankings 1 is the best and 100 is the worst.

Top 10 Taxable-Bond-Fund Families by Asset-Weighted Three-Year Rank
	3-year Asset-Weighted Rank (Feb. 2005)	3-year Asset-Weighted Rank (Feb. 2008)	Change in Rank
PIMCO Funds	38.64	13.28	25.37
Vanguard	31.61	14.96	16.65
Natixis Funds (Loomis Sayles)	3.81	19.87	-16.07
T. Rowe Price	40.84	25.20	15.63
Franklin Templeton Investments	37.86	32.79	5.07
OppenheimerFunds	48.40	37.97	10.43
Fidelity	24.83	38.37	-13.55
Dodge & Cox	12.00	43.00	-31.00
American Funds	15.45	51.35	-35.90
Eaton Vance	60.12	53.27	6.86

1. PIMCO Funds, Top 13%
A couple of years ago PIMCO developed the thesis that the housing bubble would burst and cause all sorts of turmoil and send interest rates lower. For a while it looked dead wrong and its funds took a drubbing. You know what happened next, and PIMCO's been in clover because it took on added duration and avoided subprime and corporate debt. I guess it has still got it. Note to self: Next time PIMCO Total Return PTTRX has a bad year, buy it in bulk. For individual investors, the best way to tap into PIMCO's prowess is to buy a Harbor bond fund that is subadvised by PIMCO (if you are a no-load investor) or the PIMCO A shares (if you are a load-fund investor).

2. Vanguard, Top 15%
The last 12 months have been a strong vindication for Vanguard's core strategy. With its low costs, Vanguard believes that it can deliver strong returns and yields and still avoid any unwise risks. Sometimes its looks stodgy when junk bonds or other exotic securities are on a roll. Yet all manner of risks--even some that looked pretty tame--have come home to spoil a lot of bond funds' returns. In addition, the way that investors have fled officially high-quality bond funds at the first sign of losses shows that Vanguard is correct in thinking that bond-fund investors have an extremely low tolerance for risk. Suffice it to say, Vanguard's low-cost, low-risk approach makes it the default option in taxable bonds.

3. Natixis/Loomis Sayles, Top 20%
Although risky strategies have been torched, some savvy investors have managed to sail right through despite some big risks. Dan Fuss and Kathleen Gaffney have done a great job of prudently taking risks in Loomis Sayles Bond LSBRX, a multisector bond fund that can invest just about anywhere. In 2007 they wisely reduced exposure to the dollar and to corporate debt. As a result, four of Loomis' seven funds have top-decile trailing three-year returns. However, I should mention that this year hasn't been quite as kind as Fuss and Gaffney have started to move back into corporate debt and they appear to have been a little early.

4. T. Rowe Price, Top 25%
T. Rowe isn't quite as cheap as Vanguard but it also aims to mute risks wherever possible. Performance here isn't driven by a bold macro call, but it did make a smart sector call. It was very wary of subprime debt, and that no doubt is why a wide range of its high-quality funds, including T. Rowe Price Short-Term Bond PRWBX, have avoided the trap that tripped up a number of smart bond-fund managers.PAGEBREAK