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Nominees for Fixed-Income Manager of the Year

Kicking off our 2011 Manager of the Year Awards.

Eric Jacobson, 12/12/2011

It's already December, and it is once again time to announce Morningstar's nominees for Managers of the Year. We'll kick off the process with nominations for fixed-income managers and then discuss our choices for domestic-stock funds on Tuesday and international-stock funds on Thursday. Those who have followed the process before know that we're not simply looking for the manager with the highest returns in a calendar year, though a strong showing is certainly one criterion. More broadly, we seek to honor those managers who have gone above and beyond the call of duty to do what's right for shareholders and have delivered superior long-term returns with a sound strategy.

This year's nominees for fixed income are an unusual group. While our past nominees and winners have frequently featured core intermediate-term bond offerings such as Bill Gross' PIMCO Total Return PTTRX, neither Gross nor many of his direct competitors found 2011's bond markets hospitable. Very few foresaw the Treasury bond market rally that dominated the year's performance charts. Many strongly underweighted the sector given its paltry payouts and concern that a spike in yields could trigger considerable pain. Even among those active managers who were more sanguine about the Treasury market environment, few, if any, even maintained a fully neutral allocation to the sector, which comprised more than 34% of the Barclays Capital U.S. Aggregate Bond Index at the end of November.

There were some standouts (in the intermediate-term bond group), such as Jeffrey Gundlach, the manager of DoubleLine Total Return Bond DBLTX, which smoked its competitors with a 9% gain through Dec. 6. But while that fund and Gundlach clearly deserve an honorable mention, the fund's fat returns were fueled by atypically large stakes in nonagency and exotic mortgage-backed securities. Those allocations gave it a much more aggressive risk profile than that of most rivals and could make the fund perform quite differently than most investors would expect from a more conventional core bond offering.

By contrast, this year's list of fixed-income nominees includes a number of bond market specialists. And while you'll probably notice a couple of trends among their parentage, it's truly coincidental; each fund was nominated individually. We'll walk through them all below and announce the winner in early January.


Data as of 11/30/2011.

John Carlson-- Fidelity New Markets Income FNMIX
Despite its name, the emerging markets that this fund invests in aren't exactly new, nor is manager John Carlson. He's been skippering this portfolio since 1995, making him among the category's most senior and experienced leaders, with several emerging-markets crises under his belt. He's also been among the most successful. The fund focuses primarily on so-called hard-currency debt, primarily issued in dollars or euros, rather than bonds denominated in each country's local currency. As a result, it's often an outlier in a category with a growing number of local-currency-focused portfolios. Carlson has been emphatic about sticking with his discipline over the years, and it paid off in 2011 after he rid the fund of its modest nondollar exposure, cut its corporate stake, and bulked up on U.S. Treasuries. The fund is no shrinking violet with a 12.8% exposure to Venezuela as its highest allocation, but Carlson's decisions have proved right often enough to produce terrific results in 2011 and over the long term.

Bill Irving, Franco Castagliuolo, and Fidelity's Taxable-Bond Management Team-- Fidelity GNMA FGMNX
This nomination was made on the merits of Fidelity GNMA and for the record produced mainly under manager Bill Irving, but our analysts were also keen to recognize the broader success of Fidelity's taxable-bond team at funds such as Fidelity Investment Grade Bond FBNDX, run by Jeff Moore, and Fidelity Total Bond FTBFX, skippered by Ford O'Neil. All three funds have placed in their respective categories' top quartiles thus far in 2011; like many other successful mortgage managers, Irving and Castagliuolo have distinguished the GNMA portfolio by selecting pools with specific vintages or loan balances, for example, that offer the promise of more-stable prepayment profiles than the market may otherwise be factoring into their prices. It's a straightforward strategy, but it's backed by significant quantitative analysis, and the team's efforts have given the fund a leg up versus other mortgage-focused funds in 2011 and have also helped it to earn a fantastic record of trailing long-term returns.

Scott Mather and PIMCO's Global Portfolio Management Team-- PIMCO Global Bond (USD-Hedged) PGBIX, PIMCO Global Bond (Unhedged) PIGLX, PIMCO Foreign Bond (USD-Hedged) PFORX, and PIMCO Foreign Bond (Unhedged) PFUIX
PIMCO is one of the few firms that manage both hedged and unhedged versions of its world-bond funds, not to mention both global and foreign (ex-U.S.) varieties. Morningstar analysts have long been fans of the work that Scott Mather and this team have done on these portfolios, and 2011 proved an exceptional year for all of them. The team wisely underweighted Japan and began moving out of peripheral Europe toward the end of 2010, favoring long maturity German bunds. By the end of September, it had shifted some 10% of assets into the United Kingdom. Those well-timed moves among others helped the fund to avoid much of this year's Europe-driven turmoil while benefiting as investors fled to markets with higher investor confidence.

Jamie Pagliocco and Fidelity’s Municipal-Bond Management Team-- Fidelity Tax-Free Bond FTABX
Miriam Sjoblom, Morningstar analyst and muni-bond-fund maven, recently used one word to describe Fidelity Tax-Free Bond: outstanding. The same could be said for Jamie Pagliocco and the entire Fidelity muni team. Despite bypassing the heavy doses of credit risk and leverage that are popular with some of the muni sector's more-aggressive offerings, this team has still managed to produce some of the best long-term records in the industry. Its success in 2011 is all the more noteworthy given that the steep difference between short- and long-maturity muni yields favored leverage strategies while credit-sensitive muni bonds turned in a very strong year.

Scott Simon and PIMCO's Mortgage Team-- PIMCO GNMA PDMIX
The success of PIMCO's mortgage strategies sometimes looks like alchemy in its simplicity. Rarely does Simon report having done anything much more complicated than shifting among different coupons in the Ginnie Mae market or adjusting his modest exposure to non-Ginnie securities such as Fannie Mae, Freddie Mac, or nonagency mortgages. Of course, there's a lot more going on behind the scenes in terms of analytics and research, and the benefits of those labors were perhaps best made clear in 2008 when PIMCO Total Return PTTRX and other portfolios from the firm steered well clear of sectors that were most badly damaged during the financial crisis. So, while Simon has done an excellent job here, producing stellar recent and long-term returns, his nomination is also a recognition of the contribution that PIMCO's mortgage team has made to the long-term success of the firm's flagship Total Return fund.

Eric Jacobson is Morningstar's director of fixed-income research and an editorial director for mutual fund content.
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