Nimble Moves Set This Investment-Grade Fund Apart

The following is our latest Fund Analyst Report for Fidelity Investment Grade Bond Fund FBNDX. Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Jeff Moore has helmed the fund since 2004 and was joined by Michael Plage, a five-year manager on Fidelity Corporate Bond, in late 2016. Together with a cadre of experts from across Fidelity’s fixed-income shop, many of whom lead their own highly rated funds, the two portfolio managers nimbly adjust sector allocations and yield-curve positioning when they determine pockets of value within the fund’s relatively constrained universe. Unlike its more-adventurous sibling, Fidelity Total Bond FTBFX, which can own up to 20% in non-investment-grade fare, this fund may reach only half that as its maximum allocation.

The portfolio's exposure to subprime mortgage-backed securities, held through an internal ultrashort account, left it struggling in 2007 and 2008, but since that point, the fund has made some strides in repairing its record. It topped two thirds of peers with a 16% surge in 2009, thanks to overweightings in battered corporate bonds and commercial MBS.

Recently, the fund has seesawed with volatile markets for credit. In late 2015, a bullish stance on energy and basic materials weighed on the fund’s calendar-year performance, which toppled 1.6% and lagged 90% of intermediate-bond peers as well as its benchmark. Many of those same names recovered, though, buoying 2016 performance to 5.3%, within the top decile of peers. Through the first half of 2017, Moore and Plage assumed a more-conservative risk posture, significantly reducing richly priced corporates and mortgages in favor of U.S. Treasuries. The resulting sector profile more closely resembles the benchmark, particularly as the fund is run duration-neutral to its index, but with plenty of liquidity to move when opportunity avails itself.

Process Pillar: Positive | Emory Zink 09/08/2017 Managers Jeffrey Moore and Michael Plage work with the standard fixed-income tool kit. Starting with a macroeconomic outlook developed in concert with other members of the Fidelity bond team and its macro research group, they adjust the fund's sector allocations and exposures to various spots on the yield curve--though big duration plays relative to the fund's Aggregate Index benchmark are off the table. Once the fund's broad positioning is determined, Moore and Plage draw on the expertise of sector specialists--including Fidelity's well-respected government team and deep pool of credit analysts--to identify attractive individual securities.

Following personnel changes and efforts to improve communication and accountability across the team, Fidelity has dealt with the issues that led to problems during a rocky 2007 and 2008. Moreover, Fidelity has invested heavily in its fixed-income operations; portfolio managers have access to a variety of tools to slice and dice the broad portfolio's risks and identify opportunities in individual credits and mortgage pools. The team has put these tools to good use, identifying relative-value opportunities in temporarily beaten-down sectors of the market and in individual securities. This skill, together with careful attention to risk management, supports the fund's Positive Process rating.

While the fund serves as Fidelity’s investment-grade-focused core bond option, Jeffrey Moore and Michael Plage have the flexibility to hold up to 10% in non-investment-grade fare and may invest in out-of-benchmark sectors such as Treasury Inflation-Protected Securities and collateralized-mortgage obligations (10% and 2%, respectively, as of mid-2017). The managers regularly differentiate the portfolio from more indexlike options by selecting from this supplemental investment menu; for example, as of July 2017, the fund’s BB exposure sat at around 5%, a bit higher than its typical low-single-digit allocation, with the managers citing recent opportunities to acquire energy and banking names with a high probability of a near-term upgrade.

Relative to its index, the fund typically underweights U.S. Treasuries in favor of corporate credit, but this allocation moves nimbly depending upon valuations. For example, as of July 2016, roughly 40% exposure to corporate credit sat well above the benchmark’s 25% stake and the typical peer’s 33%. By July 2017, following significant tightening in credit spreads and low economic growth projections, that exposure had been reduced to 29%, much closer to the benchmark’s 25% and lower than the typical peer’s 31%. This more-conservative risk posture includes a focus on liquidity in the form of a modest overweighting in Treasuries, as the managers wait for market opportunities.

Performance Pillar: Neutral | Emory Zink 09/08/2017 The fund's investment-grade mandate and duration-neutral positioning translate to a hemmed-in approach versus more intrepid intermediate-term bond rivals. Combined with a few missteps in the preceding decade, the fund has lagged its peers and its Aggregate Index benchmark over the long term. During Jeff Moore's tenure, from December 2004 through August 2017, the fund returned an annualized 4.1% and trailed the median of the U.S. intermediate-bond Morningstar Category, earning a Neutral Performance rating.

In 2007 and 2008, the portfolio’s exposure to subprime MBS left it struggling, but since that point, Moore has shown skill in navigating tougher markets and taking advantage of dislocations within the mandate’s confines. The fund topped two-thirds of peers with a 16% surge in 2009, thanks to an overweighting in battered corporate bonds and commercial MBS. Moore trimmed credit risk coming into 2011, and this helped the fund outpace the Bloomberg Barclays Index for the year--one of only a handful of funds to do so. In more recent credit markets, performance has seesawed but ultimately delivered. In late 2015, a bullish stance on energy and basic materials names weighed on the fund’s calendar-year performance, which toppled 1.6% and lagged 90% of intermediate-term bond peers. But in 2016, many of those names recovered and buoyed performance to the category’s top decile.

People Pillar: Positive | Emory Zink 09/08/2017 Jeff Moore has helmed this fund since 2004, with some recent co-portfolio manager changes. In the first half of 2015, Pramod Atluri served as comanager before leaving the firm to pursue other opportunities. Michael Plage, a five-year manager on Fidelity Corporate Bond FCBFX, formally assumed the position in October 2016. Moore and Plage's experience, combined with Fidelity's significant investments in its taxable fixed-income team, support a Positive People rating. Of note, Moore belongs to Fidelity's core bond team, and regularly discusses positioning with Ford O'Neil, lead manager on Gold-rated Fidelity Total Bond FTBFX.

Moore and Plage draw heavily on the work of Fidelity's sector teams and credit analysts in constructing this portfolio. Bill Irving and Franco Castagliuolo, who manage Gold-rated Fidelity Government Income FGOVX and Fidelity GNMA FGMNX, play an active role in allocating the portfolio's mortgage stake, while a 40-strong investment-grade credit team provides insight on individual issues. Other resources available include a dedicated macro effort, a structured research group, and Fidelity's extensive high-yield team. Finally, Fidelity's relatively large corps of traders includes specialists in corporate bonds as well as mortgages and Treasuries. Portfolio managers sit next to traders on the desk who can give them quick feedback on flows and sentiment in the bond market.

Parent Pillar: Positive | 04/18/2017 Long one of the industry's biggest asset managers, Fidelity has faced pressure as investors have pulled money from the active U.S. equity funds for which the firm is best known. While significant outflows could gravely impact some firms, Fidelity is shielded by its diverse mix across asset classes (including its own competitively priced index funds), success in other business lines, and private ownership that helps it escape quarterly earnings scrutiny.

The asset-management division remains well-staffed amid cost-cutting across the firm. Still, the firm could stand to rationalize its active-equity fund lineup: There are many redundant or mediocre funds alongside the standouts run by longtime star managers and up-and-comers. Retaining talent remains critical, particularly following the unexpected retirement announcement of a talented young small-cap manager. To its credit, Fidelity has handled equity manager transitions better than in the past. Meanwhile, Fidelity's fixed-income division remains among the industry's best, with a team-oriented approach assuaging key-person risk. Fidelity's target-date funds have improved, and the firm's technology and trading resources remain topnotch.

Even as it has raced to address competitive headwinds by unveiling a handful of factor-based exchange-traded funds, Fidelity remains capable on the actively managed side, earning a Positive Parent rating.

Price Pillar: Positive | Emory Zink 09/08/2017 In today's low-yield environment, keeping expenses low is more important than ever. With fees of 45 basis points on this fund's no-load share class, it's cheaper than all but a handful of actively managed intermediate-term bond funds, supporting the fund's Positive Price Pillar rating. Expenses on its advisor-sold share classes are also reasonable relative to other similarly structured options.