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Bond Squad: Last Year's Champs Stand Firm

2002's stars continue to shine bright despite changed market.

Scott Berry, 12/02/2003

<SPAN class=v12666666content> <P>As we start to consider the contenders for the 2003 Morningstar Fixed-Income Manager of the Year award, we thought it would be a good time review how last year's standouts have fared.</P> <P>The market environment has changed dramatically since last fall, with high-yield corporate bonds rallying hard and long-term Treasury issues struggling to eke out small gains. A number of last year's stars, however, have continued to shine bright. /?></P> <P><SPAN class=v12666666content><STRONG>Dodge & Cox Income</STRONG> /?> <?XML:NAMESPACE PREFIX = MSTR /?><MSTR:SECURITY>DODIX</MSTR:SECURITY></P> <P><SPAN class=v12666666content>Last year's Fixed-Income Managers of the Year have continued to deliver solid results in 2003. The fund hasn't crushed its average peer, as it did in 2001 and 2002, but it has gained 5.2% for the year date through Nov. 21, outperforming close to three fourths of its intermediate-term bond category peers. /?></P> <P><SPAN class=v12666666content>The fund's expense advantage has done much of the heavy lifting this year, but its high-yield bond stake (6.4% of assets) and a defensive duration posture have also contributed to the fund's near-term success. Though the portfolio struggled along with the overall market when rates spiked over the summer, its high-yield stake and defensive interest-rate posturing helped limit its losses. /?>  </P> <P><SPAN class=v12666666content><STRONG>Fidelity Spartan Intermediate Muni</STRONG> /?> <MSTR:SECURITY>FLTMX</MSTR:SECURITY></P> <P><SPAN class=v12666666content>A runner-up for Fixed-Income Manager of the Year in 2002, this fund's management team continues to impress. Indeed, since the first of this year, this fund has gained 4.8% and has outperformed more than 90% of its category peers. /?></P> <P><SPAN class=v12666666content>Much of that success owes to management's success in scouring the municipal bond universe for issue- and sector-specific opportunities. The fund's utilities and health-care holdings have performed particularly well in 2003. This fund is just one example of the team's success though. In fact, every one of Fidelity's municipal bond funds ranks in the top quartile of its respective category for the trailing three-, five-, and 10-year periods ended Oct. 31, 2003--a remarkable feat. /?> </P> <P><SPAN class=v12666666content><STRONG>Loomis Sayles Bond</STRONG> /?> <MSTR:SECURITY>LSBRX</MSTR:SECURITY></P> <P><MSTR:SECURITY></MSTR:SECURITY><SPAN class=v12666666content>This fund posted excellent results in 2002 and has put up even bigger numbers in 2003. The fund has gained a whopping 25.3% since the first of the year and has outperformed all but a handful of its multisector bond peers. /?></P> <P><SPAN class=v12666666content>The fund's high-yield bond stake has fueled its returns, while its emerging-markets debt positions have also given it a nice lift. And while many of the fund's peers have reined in their risk in recent months to protect against potentially rising interest rates, managers Dan Fuss and Kathleen Gaffney have become cautious, but not to the degree that many peers have. That positioning could hamper the fund if rates tick higher, and it did during July when the fund trailed most multisector offerings. /?></P> <P><SPAN class=v12666666content>Overall, however, the balance offered by Fuss and Gaffney's more eclectic international and credit-sensitive holdings has kept the fund from succumbing to more serious interest-rate-driven volatility.   /?></P> <P><SPAN class=v12666666content>It bears mentioning that Loomis Sayles recently posted a /?><A href="http://www.loomissayles.com/pdf/homepage/MFT%20letter_web.pdf" target="_blank" ><SPAN class=v12666666content>letter from CEO Robert Blanding /?></A><SPAN class=v12666666content> saying that the firm "found two instances where [the firm] accepted investments that might lead to increased trading activity in the Loomis Sayles Bond Fund." We've reviewed the letter and met with Fuss to discuss the issue, and we see no reason at this point to curb our faith in him or this fund. /?></P> <P></P> <P><SPAN class=v12666666content><STRONG>WPG Core Bond</STRONG> /?> <MSTR:SECURITY>WPGVX</MSTR:SECURITY></P> <P><MSTR:SECURITY></MSTR:SECURITY><SPAN class=v12666666content>After pounding its average intermediate-term bond peer in 2001 and 2002, this fund has come back to earth a bit in 2003. Since the first of the year it has basically matched the category's returns. /?></P> <P><SPAN class=v12666666content>The fund takes on less credit risk than its average peer, which has put the portfolio at a slight disadvantage given the corporate bond market's strong rally. And with managers Daniel Vandivort and Sid Bakst keeping the fund's duration within a narrow range of the Lehman Brothers Aggregate Bond Index's, the fund has suffered along with the index when rates have spiked. We remain big fans of the fund, though. We simply think market forces have prevented it from standing out recently. /?></P> <P><SPAN class=v12666666content><STRONG>T. Rowe Price High Yield</STRONG> /?> <MSTR:SECURITY>PRHYX</MSTR:SECURITY></P> <P><MSTR:SECURITY></MSTR:SECURITY><SPAN class=v12666666content>Market forces have also held this fund back in 2003. /?></P> <P><SPAN class=v12666666content>Manager Mark Vaselkiv typically positions this fund a bit more conservatively than the high-yield category as a whole. And with lower-rated junk bonds leading the high-yield bond market since last fall, this fund has struggled to keep pace with its more-aggressive rivals. For the year to date, the fund gained 18.9% but underperformed nearly two thirds of its category peers. Vaselkiv has added a few lower-rated issues to the portfolio in recent months to guard against rising interest rates, but until the high-yield market comes back to earth a bit, this fund could struggle to stand out. Nevertheless, we remain confident in Vaselkiv's abilities and think the fund is still a top choice. /?></P> <P><SPAN class=v12666666content><EM>Scott Berry is an analyst with Morningstar.</EM> /?></P>

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