Bond Fund Manager of the Year Candidates

Finally, a chance to write about funds with positive returns. Most bond fund categories have put up enjoyable returns so far this year as falling rates have added a little kicker to the modest yields that bond funds are dishing out. Thus, many of the top candidates for bond fund manager of the year have had to negotiate their way through a minefield to earn those nice returns.

Telecom bankruptcies have wounded scores of high-yield funds. Fidelity Capital & Income (FAGIX) is down a painful 16% as bonds from telecom and cable companies such as Adelphia  got whacked. They're not alone either. AIM, Alliance, PIMCO, Morgan Stanley, and Dreyfus have junk-bond funds that have suffered double-digit losses.

In searching for good candidates, I looked for strong year-to-date and long-term performance. I came up with some familiar names. Two past managers of the year and managers of funds that have been Analyst Picks for a good while made the cut.

Deutsche's bond team--Deutsche Fixed Income 
This fund is a perfect example of the kind that's holding up well this year. Comanager David Baldt and team have consistently beaten the Lehman Brothers Aggregate even though they keep duration and yield-curve positioning tied to the benchmark's. They steered clear of junk and anything else that looks shaky. In April and May, they sold the fund's small positions in WorldCom  and Qwest  just before bad news emerged that clobbered the bonds. The team will take risks on the sector side, however. They look for mispriced bonds and are willing to significantly overweight sectors relative to the benchmark if that's where they're finding attractive investments. The same crew won the award under the name of Morgan Grenfell a few years back.

Management Team--Dodge & Cox Income (DODIX)
Whether it's stock funds or bond funds, a conservative approach to risk coupled with strong fundamental analysis have been the keys to success this year. Dodge & Cox Income is a remarkably consistent all-weather performer. The strategy is simply to use Dodge & Cox's superior research skills to pick better issues than their peers. You won't see any big interest rate bets here. Staying clear of the disasters has enabled the fund to post a nifty 5.27% return this year.

Bill Gross--PIMCO Total Return (PTTRX)and Harbor Bond (HABDX)
If you're a regular reader, you already know the story here. Good management, a sound strategy, and low costs will take you very far. This year, Bill Gross, a two-time manager-of-the-year winner, has made some savvy bets on mortgages and inflation-protected securities. Although such bets usually work well for Gross, his style is far more aggressive than Dodge & Cox Income or Deutsche Fixed Income. PIMCO Total Return and Harbor Bond are up a little more than 5% this year, and as an added bonus, PIMCO Total Return recently passed Fidelity Magellan (FMAGX) as the second largest fund around.

Bruce and Ernest Monrad--Northeast Investors (NTHEX)
So far this year, the Monrads have pulled off an amazing feat: They piloted a high-yield fund to a 4.85% return. That compares with a 6.85% loss for its average peer. Needless to say, they've kept their distance from heavily indebted telecom companies. The fund is far riskier than those listed above, yet the Monrads' adept management has meant that fundholders have been well-rewarded over the years. This year they managed to find a number of companies whose balance sheets actually improved.