Which Bond-Fund Managers Are Delivering in 2008?

With bond-market returns bouncing up and down in recent months--with different sectors seemingly in and out of favor depending on the day--we thought we'd turn a spotlight on those fund managers that are having the most luck navigating the market's tricky waters.

Hogging that spotlight, of course, is Bill Gross of PIMCO. Gross was named Morningstar's Fixed-Income Manager of the Year in 2007, and he has continued to deliver in 2008. PIMCO's flagship  Total Return (PTTRX) hasn't put up big numbers recently, but its 1.65% return for the year to date through June 20 topped roughly 98% of its intermediate-term bond rivals'. Gross spotted housing trouble early on and positioned the fund for falling interest rates, which he got. And more recently, he has looked to stay ahead of the pack by migrating to government-backed mortgages, which have offered nearly as much yield as AA corporate bonds but with none of the accompanying credit risk.

Joe Deane and David Fare of Western Asset, finalists for the Manager of the Year award last year, have also kept their funds at the front of the pack. In fact,  Legg Mason Partners Managed Municipal (SHMMX) has cruised past 99% of its muni-national intermediate peers since the first of the year. That follows on the heels of similarly strong showings in 2006 and 2007. A decision to hold higher-coupon munis has paid off for Deane and Fare, as have timely adjustments to the fund's interest-rate exposure.

Bob Rodriguez, manager of  FPA New Income (FPNIX), is also having another strong year. At Morningstar's 2007 Investment Conference, Rodriguez talked extensively about looming credit trouble, and he avoided all of it by stashing basically all of his fund's assets in AAA rated securities. But not only that, Rodriguez shortened his fund's duration to that of a typical ultra-short term bond fund. That positioning limited the fund to just money-market-like returns in the first half of 2008, but it spared the fund from the losses that have stung many peers.

Jeffrey Gundlach of mortgage-focused  TCW Total Return (TGLMX) also warned of shaky credit ratings at last year's Morningstar's conference, and had also positioned his fund to weather a credit storm. So when it came, Total Return held firm, returning 6.6% in 2007 and another 0.9% since the first of the year. Gundlach and comanager Philip Barach have starting shifting assets toward nongovernment mortgages, however, arguing earlier in the year that the market was presenting one of the greatest risk reward opportunities of the past 25 years.

T. Rowe Price's municipal-bond group has also avoided trouble. Jim Murphy sounded the alarm on lower-rated munis in 2006, arguing that they simply weren't offering enough yield in return for their added risk. And the group has long been careful to evaluate the credit-worthiness of bond issuers, whether the bonds were covered by insurance or not, so the downgrades of the major insurance providers have had little impact here. Municipal flagship  Tax-Free Income (PRTAX) has lost 0.4% since the first of the year, but has bested more than 85% of its muni national long-term rivals. The firm's taxable funds have also fared well, with  New Income (PRCIX) outperforming 90% of its intermediate-term bond peers.

A number of Fidelity's investment-grade taxable bond funds have suffered from subprime-related exposure, but its high-yield funds have held up quite well. Fred Hoff, manager of  Fidelity High Income (SPHIX), has played good defense, selling automakers and holding an underweight to riskier CCC bonds. But while that positioning could have held the fund back during the high yield market's recent mini-rally, the fund's exposure to floating-rate loans carried it past most rivals. Loans are typically more defensive than junk bonds, but loans were severely punished early in the year and have rallied back strongly since March. Mark Notkin, manager of sibling  Capital & Income (FAGIX), has also held a sizeable loan stake.

Investors need to be wary about chasing performance, as success can be fleeting for many funds. However, the managers discussed above have not only enjoyed success recently, but over the long term as well. And all are forward-looking in their approaches, so we wouldn't bet against them continuing to deliver good relative results.