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Bond Squad: Last Year's Stars Continue to Shine Brightly

Four of 2005's best performers are still getting the job done for shareholders this year.

Scott Berry, 11/20/2006

As we start to consider the contenders for the 2006 Fixed-Income Manager of the Year award, we thought it would be a good time to review how last year's standouts have fared. The market environment has changed dramatically since last fall, with the Federal Reserve now on the sidelines and the automakers on firmer footing. But four of last year's winners have continued to deliver strong returns.

Metropolitan West Total Return MWTRX
Last year's winners are making a push to repeat. The team led this fund past 96% of the funds in the intermediate-term bond category in 2005, and it has equaled that task through the first 10 months of 2006. Timely adjustments to the fund's interest-rate sensitivity and exposure to lower-quality bonds, which have held firm despite a softening economy, have kept the fund well ahead of its average peer. For the year to date through Oct. 31, the fund returned 5.0%, while its average peer returned 3.4%.

TCW Total Return Bond TGLMX
Jeffrey Gundlach and Philip Barach continue to wave their mortgage magic here, leading the fund to a top-decile showing in the intermediate-term bond group for the year to date through Oct. 31. Mid- and lower-quality corporate bonds have pushed the returns of many funds higher in 2006, but not here. This fund holds nearly 98% of its assets in AAA rated mortgages, so traditional corporate bonds play almost no role. Not all the fund's mortgage holdings are plain-vanilla issues, however, as the fund will hold principal-only and/or inverse floating-rate collateralized mortgage obligations, for example. In other hands, those securities may raise some red flags, but we think Gundlach and Barach have few peers when it comes to understanding the ins and outs of different mortgage securities.

Eaton Vance National Municipals EANAX
Tom Metzold is once again putting his flexible approach to good use. Opportunistically tilting the fund's interest-rate sensitivity and keeping exposure to mid- and lower-rated bonds have helped the fund trounce its average peer in 2006. The fund returned a handsome 8.8% for the year to date through Oct. 31, more than double the 4.3% return of its average muni national long-term category peer. Of course, flexibility can mean greater risk in the form of zero-coupon rate-sensitive bonds and/or bonds that carry no third-party credit rating. But Metzold's approach has rewarded loyal investors willing to take on some added risk.

Nuveen High Yield Municipal NHMAX
Here too, management has continued to put up solid numbers. As the fund's name implies, manager John Miller has invested heavily in mid- and lower-rated municipal bonds. And those areas of the market have continued to show good strength, as defaults remain low and demand from yield-hungry investors remains high. General market trends have helped the fund deliver strong absolute returns, while good issue selection in airlines, hospitals, and other sectors have kept the fund well ahead of its average high-yield muni peer. For the year to date through Oct. 31, the fund returned 7.8% and outperformed roughly 80% of its category peers.

Scott Berry is an analyst with Morningstar. 

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