Our Finalists for Fixed-Income Manager of the Year

Last week we announced our list of finalists for Domestic-Stock Manager of the Year. This week we turn our attention to the bond-fund universe with the nominees for Morningstar Fixed-Income Manager of the Year.

First, some clarification. As the title implies, our analysts focus on calendar-year returns when nominating and voting on managers. However, we also consider a number of other factors, including long-term results, when evaluating contenders. Lots of funds with flashy returns might qualify as one-hit wonders, but we're looking for standout managers with durable strategies who have a proven ability to create long-term value for shareholders. We also consider the stewardship and shareholder-friendliness of each fund. We look for funds that do right by investors by keeping costs down and by communicating with shareholders about their defeats as well as their victories.

Before we get to the finalists, we'd like to point out two contenders that didn't quite make the final cut. First up is Bill Gross. The two-time Manager of the Year has had another fantastic year, as  PIMCO Total Return (PTTRX) has continued to deliver impressive results. The team at  American Funds American High Income Trust (AHITX) also deserves a nod. That fund has cruised past its average high-yield peer and boasts a strong long-term record. We remain big fans of both funds, but neither earned enough votes this year to be among our analysts' top choices.

Now let's review the credentials of those finalists, in alphabetical order.

Jeffrey Gundlach
 TCW Galileo Total Return Bond  (TGLMX)
This fund is like a cat that thinks it's a dog. It's a mortgage portfolio, but it competes head to head with more diversified funds that own corporate issues, asset-backed securities, and a variety of other bond sectors. Gundlach argues that mortgage securities offer superior returns and less risk, and the fund's results support those claims. In 2005, Gundlach focused a lot of attention on discount mortgages in an effort to protect the fund from duration extension, where mortgages become increasingly interest-rate-sensitive as rates move higher. His efforts have placed the fund near the top of the charts this year and have limited its overall volatility in what has been a somewhat choppy market.

Tom Metzold
 Eaton Vance National Municipals (EANAX)
Metzold has done a lot right in 2005. For starters, he has opportunistically employed hedging tools to defend against rising interest rates. He has also held yield-rich inverse floaters and strong-performing mid-, lower-, and non-rated bonds. His efforts have placed the fund in the muni national long-term category's top percentile, not only for the year to date through Dec. 14, 2005, but also for the trailing three-, five-, and 10-year periods. To be sure, Metzold courts more risk than his average peer, and the fund has hit some bumps in the road along the way. However, Metzold and Eaton Vance's analyst group deserve kudos for their near-term and long-term success.

John Miller
 Nuveen High Yield Municipal Bond (NHMAX)
The high-yield muni sector is like the Wild West of the bond market--many bonds come without ratings, and such holdings aren't always liquid enough to unload quickly if an issuer falls on hard times. Miller is proving to be quite skilled at navigating that environment. In fact, his fund has ranked near the top of the charts in each of the past five calendar years. How has he done it? By focusing on issuers that he deems to be essential to the communities in which they operate. In 2005, the fund's exposure to hospitals and charter schools has worked in the fund's favor to the tune of a 6.67% return for the year to date through Dec. 14. One possible concern here is the fund's size. We'd like to see Nuveen close the doors before the fund's asset base grows so big that it becomes a hindrance.

Tad Rivelle, David Lippman, Laird Landmann, and Stephen Kane
 Metropolitan West Total Return Bond  (MWTRX)
Unlike some competitors, this group uses every club in its bag. It will adjust the fund's interest-rate sensitivity, shift into different sectors of the bond market, or bulk up on individual bond issues when opportunities present themselves. The fund's flexibility can cause its short-term results to deviate sharply from those of its intermediate bond peers, as we saw in 2002 and 2003. But the team has put the fund's flexibility to good use over the long term, as evidenced by its solid long-term returns. The team used corporate bonds to push the fund past its average peer in 2004, while in 2005 profitable forays into high-yield bonds, bank loans, and other specialty areas of the market have helped it nearly double up its average peer.

Update
The team at  Dodge & Cox Stock (DODGX) earned more than 60% of the vote in last week's Manager of the Year reader poll. Chris Davis and Ken Feinberg of  Selected American Shares (SLASX) came in second with 13.8% of your votes, while Bruce Berkowitz of  Fairholme Fund  (FAIRX) pulled in third with 12.2%. Stay tuned to see if your pick for Fund Manager of the Year matches ours when we announce the winners of our Manager of the Year awards in early January. Please, no wagering.