In a year where credit ruled, these five managers stood out.
The two big bond stories of 2016 were the sharp reversal in the path of bond yields midyear and an impressive rally in corporates. Against the backdrop of plunging oil prices, concerns about global growth, and Brexit, bond yields shifted down during the first part of 2016. By the third quarter, though, bond yields were edging upward, a trend that accelerated following the election. The Fed hiked rates by 25 basis points in mid-December, and most bond funds were in negative territory for the fourth quarter.
After a rough 2015 and tough start to 2016, meanwhile, credit rallied through much of the rest of the year, with particularly strong performance in energy-related names. Many funds that did poorly in 2015’s rocky credit markets performed well in 2016 as risk paid off. The best-performing sector in 2016 was high-yield bonds, with the Bank of America High Yield Master II Index gaining 17.5% for the year, compared with a less than 3% gain for the Bloomberg Barclays U.S. Aggregate Bond Index.
The ebb and flow of the bond market caused some managers and funds to look great in one quarter and not so great the next quarter, highlighting the importance of sound strategy and a longer-term outlook. Although a strong showing in 2016 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. As a result, all nominees have earned a Morningstar Analyst Rating of Bronze, Silver, or Gold, indicating that our analysts believe the funds will outperform their peers on a risk-adjusted basis over a full market cycle.
This year's nominees for Fixed-Income Fund Manager of the Year are as follows:
Mary Ellen Stanek and Team, Baird Core Plus Bond BCOIX
Baird Core Plus Bond’s long-tenured team, led by Mary Ellen Stanek, implements a straightforward strategy that has produced strong absolute and risk-adjusted results over time, supporting its Morningstar Analyst Rating of Silver. The fund is managed with a duration that is kept in line with that of its Barclays U.S. Universal benchmark and does not use derivatives or foray into foreign currency. Ultimately, sector allocation decisions and security selection, particularly within the fund’s credit holdings, are critical to success, and the team has delivered consistently. Moreover, without substantial allocations to high yield and emerging markets, this fund has kept pace with and often surpassed more-intrepid peers who have a wider variety of levers at their disposal. In 2016, an overweighting to credit and strong security selection, especially in financials, helped it to a 4.8% gain that edged out roughly 85% of its peers. Modest allocations to commercial mortgage-backed securities (5% as of December 2016) and out-of-benchmark nonagency residential mortgage-back securities (8% as of December 2016) also added to returns. That the fund has delivered strong results in a risk-conscious and consistent way, tested by bouts of market stress, makes it a compelling option for this year’s top prize.
Fixed-Income Investment Policy Committee, Dodge & Cox Income DODIX
Dodge & Cox's seasoned eight-member investment policy committee has earned a nomination for Dodge & Cox Income’s agility during 2016’s alternatively risk-off/risk-on environment. The fund’s 5.6% gain handily beat its Bloomberg Barclays Aggregate U.S. Bond benchmark's 2.7% gain and topped 94% of intermediate-term peers.
A credit-heavy (and concentrated) portfolio requires an experienced team delving deeply into the fundamentals of firms and their bonds. This team works off a three- to five-year investment horizon and has patience with a number of long-term themes, though its managers aren’t afraid to make changes when valuations warrant. For example, the team added more than 7 percentage points to its corporate stake between mid-2015 and March 2016, a time when valuations largely dropped and spreads widened. After a quick rebound, the managers reduced corporates by 4 percentage points by September 2016. The fund’s long-standing shorter duration stance also paid off as bond yields increased in the second half of the year. Over longer periods of time, this Gold-rated fund has also drummed up an impressive track record. Its 10-year trailing return through December beat 85% of the intermediate-term bond category, and it has also stood out on a volatility-adjusted basis.
Ford O’Neil and Team, Fidelity Total Bond FTBFX
The risk-on markets of 2016 proved a boon for Fidelity Total Bond, a core-plus strategy run by long-tenured manager Ford O’Neil and his team. A team-based approach employs expertise from across Fidelity’s mortgage, municipal, and credit specialists, many who run well-rated funds in their own rights. Employing the fund’s flexible mandate, O’Neil aggregates this broad information and translates it into positioning at a total portfolio level with an eye to risk management.