In a competitive 2012, a few new contenders stand out alongside a couple of tried-and-true names.
In 2012, the bond-market spoils generally have gone to managers who were willing to take risk, particularly credit and nondollar risk. High-yield and emerging-market bond benchmarks have returned between 13% and 18% so far this year, for instance. Meanwhile, a host of currencies in Asia, Latin America, and Eastern Europe appreciated against the greenback.
None of these areas is represented in the widely followed Barclays U.S. Aggregate Bond Index, which is up a relatively modest 4%. Morningstar's Eric Jacobson previously noted that many funds in the intermediate-term bond category have increasingly ventured beyond their U.S. government-heavy benchmark, so it's not surprising to see more than 80% of the category beat the index in 2012. What has worked for funds in 2012 didn't work in 2011, though, when more than 80% of the category lagged the Aggregate Bond Index.
Impressively, some of our 2012 nominees managed to outperform in both of these opposing environments, while others had the discipline to stick to their bets, as well as the conviction to add to them when the going got tough. Although a strong showing in 2012 is an important criterion in selecting our nominees, we also want to recognize managers who have delivered superior long-term returns with sound strategies that continue to earn our analysts' confidence.
The Fund Manager of the Year nominees for the Alternatives and Allocation categories will be revealed on Tuesday, Dec. 18, and Wednesday, Dec. 19, respectively. All of the winners will be announced in the first week of January.
This year's nominees for Fixed-Income Fund Manager of the Year are:
Steve Smith, David Hoffman, Brian Hess, and Jack McIntyre,
Legg Mason Brandywine Global Opportunities Bond GOBIX
Year-to-Date Return Through Dec. 13, 2012: 12.2%
Category Rank (Percentile): 11
This world-bond fund has only been around for six years, but the team at Brandywine Global has been exercising its path-breaking brand of global fixed-income investing since the mid-1990s, amassing more than $30 billion in fixed-income assets under management over the years across strategies and accounts. The managers argue that following traditional global-bond benchmarks that skew toward the most heavily indebted nations is a dangerous way to go, so they don't pay them any mind when constructing the fund's portfolio.
The team has delivered several outstanding years in a row. In 2011, the managers' concern about the impact of high oil prices on the developed world’s consumers led them to take some defensive steps, such as adding exposure to long U.S. Treasuries. Finding the climate more conducive for risk-taking in 2012, the fund has benefited from purchases in the battered U.S. bank corporate bond sector late last year, growing exposure to Mexico, and a stake in controversial Hungary's bonds and currency, among other factors. The managers' contrarian-flavored approach has caused some bumps along the way, but for those with the fortitude to see it through, the ride has been rewarding.
Peter Palfrey and Rick Raczkowski, Loomis Sayles Core Plus Bond NEFRX
Year-to-Date Return Through Dec. 13, 2012: 11.1%
Category Rank (Percentile): 7
Dan Fuss and team at Loomis Sayles Bond LSBRX may get all the limelight, but Peter Palfrey and Rick Raczkowski have quietly assembled an excellent long-term record here over the years. While they don't court as much controversy in the fund's corporate stake as their fund's better-known sibling, they do pull more levers than the typical intermediate-term bond fund, often holding sizable stakes in junk corporate and nondollar bonds. Last year, their nondollar bets, which included shorting the euro, and a timely shift into 30-year U.S. Treasuries kept them ahead of their benchmark and more than 90% of their peers. After shifting gears in late 2011 and 2012, the fund has since gotten a boost from the team's corporate bargain-hunting, including a growing stake in emerging-market corporates, as well as tactical exposure to the Mexican peso.
The pair's recent and longer-term success is also a testament to the supportive infrastructure the firm has built around them and other bond portfolio managers during the past decade. The fund used to sink or swim based on its credit exposure, but the managers report that the firm's enhanced quantitative analytics and sector expert teams have proved invaluable in helping them avoid taking unintended risks.
Tad Rivelle, Stephen Kane, and Laird Landmann,
Metropolitan West Total Return Bond MWTRX
Year-to-Date Return Through Dec. 13, 2012: 11.2%
Category Rank (Percentile): 7
TCW/MetWest's fixed-Income CIO Tad Rivelle and crew won the Fixed-Income Fund Manager of the Year Award in 2005 and have been nominated multiple times in the past, including for Fund Manager of the Decade in 2009. The managers have delivered another excellent showing in 2012, in part due to their ability to keep cool heads amid a challenging 2011. Unlike the previous two nominees, the team didn't manage to beat the fund's index or typical peer in 2011, but while overweighting in financial corporates and nonagency residential mortgage bonds caused the fund to give up some ground last year, that period of volatility also provided an opportunity for the team to showcase its discipline.
The team didn't think slumping prices on bank and nonagency mortgages changed the fundamental story for either sector, so it took advantage of last year's sell-off to increase the fund's risk in both areas. Those moves have paid off handsomely in 2012, but the managers have been no less busy; they've steadily reduced the fund's exposure to the riskier bonds that have rallied the most. The fund still sports a more credit-sensitive portfolio than the category norm, but the managers' patient and methodical value discipline has helped ensure that investors are ultimately rewarded for the risks they take.
Mark Kiesel, PIMCO Investment Grade Corporate Bond PIGIX
Year-to-Date Return Through Dec. 13, 2012: 14.7%
Category Rank (Percentile): 2
Mark Kiesel's success at this corporate-bond-focused fund poses a challenge to those who'd claim that top-down macro maneuvers are the be-all and end-all at PIMCO. The investment committee's outlook certainly plays a critical role in shaping the portfolio, but Kiesel's work in recent years has showcased the firm's bottom-up research as well. In a year when PIMCO as a firm has sounded a cautious note on credit risk, for example, Kiesel seemed to up the ante, buying the bonds of building-materials companies that stand to benefit from a housing recovery, as well as the debt of companies in other cyclical industries such as gaming, autos, and chemicals. That willingness to break ranks has paid off this year.
The fund didn't keep up with its Barclays U.S. Credit Index bogy last year (a rare occurrence here) because of Kiesel's multiyear emphasis on the bonds of large U.S. banks, which flagged amid the third quarter's volatility. But 2011's famine was 2012's feast as that sector came roaring back; many of the fund's banking names have counted among its top individual contributors this year. When it comes to security selection, Kiesel also gives due credit to the firm's 40-plus credit research analysts, a team that PIMCO has built out in recent years.
Mark Egan, Tom Fink, Todd Thompson, and Steve Vincent,
Scout Core Plus Bond SCPZX
Year-to-Date Return Through Dec. 13, 2012: 9.7%
Category Rank (Percentile): 14
Based in Columbus, Ind., the team at fixed-income boutique Reams Asset Management may be the most obscure of the nominees, but no less deserving of recognition. The $500 million Scout Core Plus Bond fund has yet to attract much attention, but that hasn't stopped firm CIO Mark Egan and crew from delivering excellent long-term returns here. Reams isn't a penny-ante player, either: The firm has managed close to $10 billion in fixed-income assets, mainly for institutions, for much of the past decade.
Like some of its fellow nominees, the team followed up a stellar showing in 2011 with a strong 2012, owing much of the fund's success this year to decisions made amid late 2011's stormy climate, including adding exposure to battered U.S. bank bonds and high-yield. Unlike the other nominees, however, the managers have pulled in the fund's horns substantially as credit has rallied this year. That's emblematic of what they've done for more than a decade. When volatility rises, they pounce. When it falls, they protect. That approach has taken a few hits along the way, but the end result has been outstanding.