Five Nominees for Fixed-Income Manager of the Year

At the end of the year, thoughts turn to roasting chestnuts, college bowl games, and New Year's resolutions. Or, if you're into mutual funds, they may turn to Morningstar's Manager of the Year Awards.

Ours sure have.

Earlier this month, Morningstar's fund analyst staff convened to discuss our 2006 nominations for the Fixed-Income Manager of the Year. As in the past, we're not just looking for a manager or team who has beat the pack during a single 12-month period. Instead, our candidates must have also shown themselves to be champions of fund owners' interests by taking friendly steps such as keeping costs low and investing large sums in their funds. Plus, they wouldn't be considered unless we also thought they had insightful strategies that gave them lasting competitive edges over their peers.

Below are our five finalists for the 2006 honor. Christine Benz, Morningstar's director of fund analysis, will announce this year's victor, along with the winners in the domestic-stock and international-stock categories, on the morning of Jan. 3 on CNBC.

Dan Fuss and Kathleen Gaffney
Loomis Sayles Bond LSBRX
Thanks to a combination of spot-on calls, Fuss and Gaffney have delivered an impressive 11.2% return for the year-to-date period through Dec. 18. The most flexible of our nominees, this fund can own a wide range of securities, from Treasury bonds to high-yield debt to corporate bonds denominated in foreign currencies. Interest-rate calls are not off the table here. The fund has used this leeway to its advantage this year. It has benefited from owning unusual bonds, such as Philippine Long Distance Telecom and Mexican homebuilder Desarrolladora Homex HXM, and from a timely decision to accept more rate sensitivity in May, just before the Federal Reserve paused in its rate-hiking campaign.

Topnotch results are nothing new here, though. By looking out several years when making investment decisions, Fuss and Gaffney have helped to make their assertive strategy work for a lot of investors over the long term. And a recent visit to Loomis Sayles' offices helped to confirm our opinion of the firm's commitment to providing the managers with topnotch research. As an aside, Fuss was our first Fixed-Income Manager of the Year back in 1995. (Gaffney joined him as a comanager here in 1997.)

Jeffrey Gundlach and Philip Barach
TCW Total Return Bond TGLMX
Gundlach and Barach, who were also nominated in 2005, have once again weaved their magic with this fund. In a year where credit risk has been rewarded, as evidenced by the stellar year enjoyed by junk bonds, this fund has stayed near the top of the charts in the intermediate-bond category despite holding 97% of its assets in AAA rated bonds.

The fund is no one-hit wonder, though. By identifying undervalued mortgages and by strategically employing inverse floating-rate securities, principal-only issues, and other such nontraditional fare, Gundlach and Barach have built a solid long-term record that ranks among the elite in the intermediate-bond category. And the fund's low expense ratio makes their expertise a bargain.PAGEBREAK