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

Ken Leech and Team
Western Asset Core Bond WATFX
One of the largest fixed-income managers around (by assets under management), Western Asset Management is also one of the strongest. Scale has afforded Western advantages such as battalions of analysts researching bonds in different sectors and the ability to offer funds with relatively small expense ratios. Leech, the firm's chief investment officer, harnesses Western's many resources to drive the performance of funds like this one. Over time, this fund and similar siblings have treated investors to some of the best risk-adjusted performance relative to other intermediate-bond managers. Another past winner, Leech took home the prize in 2004.

Earlier in 2006, it did not appear that Leech and Western had much of a chance of appearing in this article. One reason is that the firm had believed that the Fed would stop raising rates much earlier than it did and had positioned the fund accordingly. Once rates stopped going up, though, the fund was in good shape to rally, and it did. Further, it has been helped by some good bond selection in the investment-grade corporate space and an overweight in mortgages. The fund has topped more than 95% of its category peers so far in 2006.

Thomas Metzold
Eaton Vance National Municipals EANAX
Metzold, who, like Gundlach and Barach, was nominated in 2005, has kept this fund at the top of the charts in 2006. In fact, the fund is on pace to end the year in the muni national long-term category's top 1% for the fifth year in a row. Metzold has continued to put his flexibility to good use by making timely adjustments to the fund's interest-rate and credit risk. He has also found value by looking for bonds with specific coupons, in select sectors, or with certain maturities. The fund is vulnerable to pullbacks, as we saw in 1999, and its volatility should not be overlooked. But when considering which managers have added the most value for shareholders in recent years, the conversation always includes Metzold.

Thomas Soviero
Fidelity Advisor High Income Advantage FAHYX
Soviero scored a hat trick in 2006 with his work on Advisor High Income Advantage, Fidelity Leveraged Company Stock FLVCX, and Fidelity Convertible Securities FCVSX. Soviero employs a concentrated approach, so his funds tend to pack a bigger punch than most. And that proved true in 2006, as all three of his funds crushed their respective category peers for the year to date through Dec. 15.

His success with Advisor High Income Advantage is most notable, as it is there that he has had the most short- and long-term success. The fund got hit by a few holding-specific problems in 2006, but the strong performance of its auto and cable holdings have helped erase any missteps. If the high-yield market cools, we'd expect this fund to come back to the pack, but Soviero's skilled issue selection should continue to work in its favor over the long term.