It's not too early to start thinking about the contenders for some year-end hardware.
"Safety first" has been the most important mantra for fixed-income investors so far in 2007. Fund managers who had been taking on less risk by owning higher-quality bonds in various sectors, of both taxable and municipal varieties, have profited from that decision this year. Because of a widening web of credit losses in the subprime-mortgage-backed market, the use of leverage by hedge funds and other parties, and a darkening domestic economic picture, many types of nongovernment securities have performed poorly.
To put it another way, the tail wind of climbing prices for nongovernment bonds relative to government bonds' marks (often referred to as "tightening credit spreads") that had been blowing since 2002 appears to have run out of force this year. The 2007 nominees for Fixed-Income Manager of the Year--listed below--weren't caught off guard by this occurrence or its magnitude.
Of course, the managers included below haven't just performed well in 2007, nor is performance the only criterion for Manager of the Year consideration. A foundation of solid long-term results, experience, low fees, and good stewardship supports each candidate. (For that reason, a number of past winners are up for consideration again this year.) As 2007 is just less than three fourths complete, the list below is preliminary. We'll choose five finalists--one or more of whom may not appear below--in December and inclFude them in the Bond Squad column that will run on Dec. 19.
Past Winners Making Waves Again
Joe Deane and David Fare of Legg Mason Partners Managed Municipals
Dan Fuss and team of Loomis Sayles Bond
Success is nothing new for shareholders here. The fund has been shining in recent years and over the long term thanks to Fuss' skillful interest-rate, sector, and currency positioning and Loomis' strong credit research. Given how well the fund had done because of high-yield and nondollar selection in recent years, we were wondering how the fund would do in choppy conditions, but Fuss and crew correctly moved the fund up in quality and rate sensitivity earlier in 2007. Look across the board and there really isn't a Loomis Sayles fixed-income fund doing anything other than crushing its peers so far in 2007.
Bill Gross and team of PIMCO Total Return
Things were looking bleak for Gross and PIMCO earlier this year as their view that the housing market would weaken, drag down the economy, and spur the Fed to cut rates was looking too pessimistic. (Total Return landed on our list of first-half bond-fund losers, as a matter of fact.) As of mid-September 2007, at least this view is looking like it was very much early rather than wrong, as this situation appears to be unfolding. Gross kept the fund (and sibling Low Duration
Bob Rodriguez and Tom Atteberry of FPA New Income
If Gross was early on rates, Rodriguez and Atteberry were ancient. The duo started sounding cautious tones in 2003, arguing that Treasury bonds' yields did not compensate investors for the risks of inflation. They started buying shorter-term paper and also treaded lightly in corporates, which they also found to be too richly priced. Since that time, the fund has looked like one of the most conservative intermediate-bond funds around. This emphasis on not losing money held it back in years such as 2004 and 2005, but it has worked like a charm in 2007--as the fund has topped 94% of rivals--and over the long term.
MetWest team of Metropolitan West Total Return
Although they haven't been as extreme as the other managers with their view on rates, the members of this fund's management team have also moved the portfolio toward issuers with less credit risk, including Treasuries, so far in 2007. To their way of thinking, valuations for corporate bonds, particularly in the high-yield sector, have been too rich and borrowing conditions have been too easy. These moves have helped the fund post a top-7% return in its category so far this year. Its long-term record, which extends back to 1997, looks even better.
Jeffrey Gundlach and team of TCW Total Return Bond
It doesn't appear as if success has been too much to handle for last year's winners, as they've steered the fund to a spot in the intermediate-bond category's eighth percentile so far in 2007. Unlike the other funds on this list and those in its category, Total Return focuses on the mortgage-backed sector above others. The managers stick primarily to government-backed mortgages, helping them to sidestep most of the trouble in the nonprime residential-mortgage-backed-securities area. This fund owns a stellar long-term risk-adjusted record.
First-Times Seizing Opportunities
Doug Swanson and team of JP Morgan Core Bond
This fund is relatively tame compared with those listed above, in that Swanson, who has been at the helm here since 1992, and his cohorts tend to favor mortgage-backed and Treasury bonds to corporate issues. Taking a safer tack has helped so far in 2007: The fund has gained 3.9%, which lands in the intermediate-term group's sixth percentile--representing the fund's best year since 1995 on a relative basis. But the intervening years haven't been too bad either, though, as the fund's 10-year return lands in the category's top quintile. The fund is also rather inexpensive.
Arthur Steinmetz of Oppenheimer Strategic Income
Mixing in some riskier bets with some more-measured steps has helped this fund along. Manager Art Steinmetz invests at least 20% of assets in high-yield bonds and at least another one fifth of the portfolio in nondollar fare, including unhedged positions. But he'll also keep that same amount or more in U.S. government issues and won't make bets on the future direction of interest rates. Positions in Treasury bonds have helped this year, as has taking some currency exposure. Like the JP Morgan offering, the fund features a very experienced manager, who is having a bit of a breakout year in 2007, and low costs relative to peers.
Paul Herbert is a senior analyst with Morningstar
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