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Contenders for Fixed-Income Manager of the Year

An early look at some strong candidates for our annual award.

Eric Jacobson, 09/26/2006

Every year, we like to take a look at which bond-fund managers are not only having a great year, but who are also likely contenders for Morningstar's Manager of the Year award.

There is a distinction, and it's an important one. Near the end of each year, Morningstar's analysts get together and choose the winner in each of three asset classes (domestic stock, international, and fixed-income). In other words, the award isn't quantitative, and it's not given to the fund that simply earned the highest return for the year. Rather, it's a subjective award, based on the collective experience of our mutual fund analyst staff and its exposure to the great managers whose work we've come to know and admire over the years. So, while the recipient can normally boast a great year, each winning manager typically has a great long-term record and has earned our respect over that time.

It's also worth noting that the funds we're about to discuss aren't part of any official list but are simply a handful likely to be nominated by our analysts once the formal process takes place late in 2006. That means that no fund on this list is guaranteed to be a finalist in December, and the ultimate winner may not be one that we even mention here.

There are a handful of funds likely to be in strong contention later this year that have already won this award at least once in the past. They include legends such as Bill Gross, who runs $96 billion dollars at PIMCO Total Return PTTRX, and Dan Fuss, skipper of numerous portfolios for Loomis Sayles. Others, such as the team at Metropolitan West Total Return MWTIX and Western Asset Core WATFX, are also having terrific years. That doesn't disqualify them from the competition, but we'll devote more space below to some that haven't yet been recipients.

Tom Metzold
Eaton Vance National Municipals
EANAX
To be frank, our initial instinct is to worry about funds like this one. Tom Metzold has lots more latitude than most when it comes to using aggressive credit, yield-curve, and interest-rate plays, and we haven't come across many funds that have enjoyed significant long-term success by using their full range. Metzold has done an amazing job here, however, most notably by sharply reining in the fund's interest-rate risk from time to time and thereby sidestepping some of the market's biggest potholes. He credits Eaton Vance's sizable team of muni managers, analysts, and traders for much of his success, but there's no denying the skill he's brought to bear.

Jeffrey Gundlach
TCW Total Return Bond
TGLMX
Jeffrey Gundlach and this fund haven't become household names in part perhaps because this no-load portfolio hasn't attracted the kind of jumbo mutual fund asset base enjoyed by some of their more well-known competitors. Institutional investors who buy mortgage-backed securities know who Gundlach is, though, thanks in large part to the stellar record he's built in recent years. This fund uses all variety of complex securities that we wouldn't want to see in the hands of the average manager, but Gundlach and his team are anything but.

Andrew Dudley
Fidelity Short-Term Bond
FSHBX
Short-term bond-fund managers who don't take on a lot of risk don't often get much attention or glory. But after close to 10 years of laboring at this and other Fidelity offerings, it may just be time for a little more public awareness. Dudley melds Fidelity's broad research capabilities with its fixed-income group's market-leading risk controls, and both are complemented by a modest cost structure that makes the whole formula work.

James Kelsoe
Regions Morgan Keegan Select Intermediate Bond
 MKIBX
With a heavy allocation to midquality BBB rated bonds, this fund and skipper James Kelsoe have an aggressive streak. The whole point is to control risk while profiting from it, though, and that's what this fund has done. The portfolio ranges all across the bond market with a menagerie of holdings from equipment leases to mobile-home loans to commercial mortgages. Ferreting out the value in those peripheral arenas has helped earn one of the best records in Morningstar's intermediate-term bond category.

Neil Langberg, Brenda Ellerin, and Karl Zeile
American Funds Tax-Exempt Bond Fund of America
AFTEX
One of the key features of the American Funds complex is its heavy emphasis on hiring great people and cultivating their skills over the long term. That's a story almost every money manager tells, but it means something here, where the breadth and tenure of the firm's managers and analysts stacks up against almost any muni firm we cover. The key issue at a fund like this that holds meaningful stakes in midquality bonds, however, is credit analysis and an ability to avoid trouble. This team has done that skillfully over the years, and the fund's terrific record is a testament.

Eric Jacobson is a senior analyst with Morningstar.

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