Early Contenders for Fixed-Income Manager of the Year

The only thing more difficult than successfully running a bond portfolio in 2008 has been producing an encore in 2009. The market was battered mercilessly as liquidity all but evaporated last year. The only way to succeed was to avoid risk, unless it was the long-maturity Treasury kind. Markets have mostly stabilized thus far in 2009, though, and last year's riskiest, most beaten-down areas have roared to life, while Treasury-heavy portfolios have been shellacked. That makes sifting for Manager of the Year candidates a tricky business given that so many of this year's hottest funds were last year's dogs. Funds with such highs and lows aren't usually those that we think of as good long-term investments.

That's not true across the board, though. Take  Loomis Sayles Bond (LSBDX), run by Dan Fuss. He's been in the business for nearly 50 years and has established a reputation as one of the industry's luminaries. It was no surprise that his funds were beaten up last year given his penchant for heading off reinvestment risk with long-maturity, credit-sensitive bonds. What Fuss hasn't done much of, though, is endure permanent losses of capital. And his gains thus far in 2009 were no accident. We met with Fuss right at the apex of last year's crisis, and while most of the market was panicking, he was eyeing bargains among traditionally cyclical names with balance sheet strength to outlast any recession.

Keep in mind that this is just a snapshot list of managers who appear likely to be in the running when Morningstar's analysts convene to vote on our Fixed-Income Manager of the Year award. The managers on this list are not assured of a nomination come December, and the eventual winner may very well be someone we haven't focused on here.

Dan Fuss of  Loomis Sayles Bond (LSBDX)
We're sometimes accused of a bias toward our favorite fund managers. Guilty as charged. If Dan Fuss isn't one of yours, then you haven't been paying attention. He's one of the smartest, most analytically sound, and instinctive managers in the business. He runs aggressive portfolios and will scour the market for value whether it's among corporate bonds or foreign currency denominated sovereigns. And while that can make Fuss' portfolios volatile, they almost always come out on top over complete market cycles.

Mark Notkin of  Fidelity Capital & Income (FAGIX)
If there's one thing you can say about this fund's 2008 performance, it's that it wasn't a surprise. Notkin picked up where his predecessor David Glancy left off in 2003 and continued to make this one of the most aggressive high-yield funds in the marketplace. In addition to riding that style to five straight top-decile years from 2003 through 2007, though, Notkin built up 20% in cash during last year's fourth quarter, giving him dry powder with which to fire up the portfolio in 2009. It returned nearly 60% through September, and with income included, the fund has more than recovered what it lost last year.

Jamie Farnham of  Metropolitan West High Yield Bond (MWHYX)
Farnham wasn't even supposed to be a mutual fund manager. As director of credit research for Met West, though, it was logical for him to take over here when Mark Unferth left in early 2006. The die was already cast by that point, thanks to an overall sense of caution on credit and the firm's feeling that valuations were frothy in the years leading up to 2008. So while the fund took a 21.6% tumble last year, it was among the softest in the high-yield category, and Farnham's prior caution gave him ammunition to fire at the market coming into 2009. The fund's 46% gain for the year through September has helped make it one of the most successful taxable-bond funds in our database when it comes to outperforming in both 2008 and this year.

Jeffrey Gundlach of  TCW Total Return Bond (TGLMX)
We once referred to Gundlach as an alchemist, and the past couple of years have only reinforced that image. We weren't surprised that he performed so well in 2008. Gundlach has always stuck almost exclusively with government-backed mortgages, if not the simplest variety, so the fund had some protection from the credit driven bear market. What's arguably even more impressive is how he's managed to produce a peer-beating 19% rebound thus far in 2009, after pumping the portfolio with nearly 46% in beaten-down non-agency mortgages at one point in 2008.

Bill Gross of  Managers Fremont Bond (MBDFX)
Paul McCulley of PIMCO Short-Term (PTSHX)
We're shoehorning these two together because they're both managers at PIMCO, and both performed well in 2008 and 2009. (PIMCO and Bill Gross subadvise Managers Fremont.) In Gross' case, it owes a lot to the firm's early recognition of the oncoming housing crisis and Gross' overall distaste for highly valued corporates in recent years. McCulley thrived with PIMCO Short-Term in part because he avoided the career-threatening 2008 errors of competitors who thought they could enjoy the extra returns of subprime mortgage debt and other risky short-term paper without having to pay the piper.

Phil Condon and Rebecca Flinn of  DWS Strategic High Yield Tax Free (SHYTX)
This is another team that rapidly shifted gears for the first time in years and was able to take advantage of the crisis. Condon and Flinn rarely ever took on as much credit risk as other high-yield muni managers, but after showing up some of their riskier rivals when the market tanked in 2008, they saw their chance to snap up credit-sensitive bargains. The fund is up a whopping 38% through September.