Four Finalists for Fixed-Income Manager of the Year

The most memorable years for the bond market invariably turn out to be the lousy ones. It's been 10 years, but the rising-rate shock of 1994 still looms large in the consciousness of most bond-fund managers. Rates rose so quickly back then that many managers were caught flat-footed. Those who bet that rates wouldn't rise paid dearly for their temerity.

Despite the expectations harbored by many, though, 2004 has been nothing like 1994. Yields have zigged and zagged, but have nearly returned to the levels they occupied a year ago. The economy has been healthy, but not robust. Partly as a result, returns on core bond funds have been tightly bunched, while high-yield portfolios have benefited, if modestly, from investors' hunger for yield.

With one exception, each of the funds that have been nominated for Fixed-Income Manager of the Year has a topnotch, if not eye-popping, 2004 record. As always, though, we're also looking to recognize the totality of a manager's record, and one who has proven impressive over the long term. Reasonable expenses are invariably a big deal for bond funds, and we particularly favor managers who look out for their shareholders.

We'll review the nominees that our analysts will vote on here, and we'll announce the winner alongside the international- and domestic-stock victors in January.

Bill Gross and Team
 Harbor Bond (HABDX)
Don't bother writing to explain why your fund or manager is better than Bill Gross. You may be able to point to periods of time that others have exceeded his returns, and there may be managers as good as he is, but you're unlikely to convince us that there's anyone truly better. This two-time Manager of the Year winner finds himself up for consideration yet again not just because he's having a good year, but because 2004 has been another in a long, long string of them. What's more, he's managed to put up solid numbers this year by stepping across the pond to Europe, without taking on the excessive credit, currency, or interest-rate risk that might otherwise have tempted a manager trying to maintain a winning streak.

It's worth noting that while we've highlighted Harbor Bond here because it is easily accessible to do-it-yourselfers and maintains a modest cost structure (Gross and PIMCO manage it through a subadvisory arrangement), the institutional share classes of  PIMCO Total Return (PTTRX) are a fantastic choice for those who can buy them.

Dan Fuss and Kathleen Gaffney
 Loomis Sayles Bond (LSBRX)
The best part of our work as Morningstar analysts is getting to sit across the table from some of the industry's sharpest minds and simply listen. Not every brilliant manager can boast an equally stellar record, but Dan Fuss can. This former Manager of the Year winner and nearly perennial nominee has also found the bond market's temperament in 2004 much to his liking. Fuss and colleague Kathleen Gaffney have significant latitude to invest outside of the U.S. investment-grade bond universe--which is why the fund is in our multisector-bond category--and stakes in high-yield and emerging-markets bonds have contributed to the fund's success this year. It has also benefited from a falling dollar thanks to foreign currency positions. In all, the fund has gained more than 10% so far in 2004, which is good for a top-9% position versus its peers.

One of the other attractive attributes about this fund is that its managers have invested significant portions of their own fortunes in the fund. Gaffney has devoted more than one third of her net worth here, and Fuss has plunked down about 30% of his personal nest egg. We take this financial commitment as a sign that their interests are aligned with shareholders'.

Jeffrey Gundlach and Team
 TCW Galileo Total Return Bond  (TGLMX)
Despite some truly impressive accomplishments here, this manager and this fund have continued to fly under most investors' radar. By taking on less interest-rate risk than most core funds benchmarked against the Lehman Brothers Aggregate and focusing almost exclusively on off-the-beaten-path mortgage bonds, Gundlach and his colleagues have managed to earn extremely competitive returns while enduring notably less volatility than most. The performance is no small-portfolio fluke, either. TCW's mortgage group successfully runs more than $30 billion across an array of institutional accounts.

Ken Leech and Team
 Western Asset Core Bond (WATFX)
Though generally not well known by retail investors, Western Asset Management has become one of the most formidable fixed-income players around. And the Pasadena-based firm, a unit of  Legg Mason , has relied on considerable resources--it employs 25 credit analysts and 27 risk analysts--and an active style to put together an impressive record. This fund's 10-year record places in the intermediate-bond group's top 2%. And despite longstanding bullish stances on interest rates and on corporate bonds that have added some volatility, the fund has also been a consistent performer. We should also point out that while the minimum investment for Western Asset Core's institutional share class is astronomical, the fund is available through some supermarkets, such as Fidelity's, with a lower hurdle.