Do You Need a Multisector Bond Fund?

Sarah Bush: Funds in the multisector bond Morningstar Category stand out for their willingness to take on more credit risk than portfolios in the intermediate core and core plus groups. Typically multisector funds hold between a third and two thirds of their portfolios in bonds with below-investment-grade ratings. As the category name suggests, multisector funds invest across a wide range of bond sectors. These include corporate bonds, sovereign developed- and emerging-markets debt, and securitized credit, with some holding large stakes in nonagency mortgages.

Because they take a hefty dose of credit risk, funds in this category often suffer losses during periods of equity market stress, which limits their diversification potential relative to stocks. As a result, intermediate core and core plus funds often make better anchors for a bond portfolio, especially if an investor has a large equity stake. Multisector funds have historically offered attractive yields and total returns for those comfortable with their risks.

Our favorite multisector bond funds include three Silver-rated options: Fidelity Strategic Income FADMX, Loomis Sayles Bond LSBDX, and PIMCO Income PIMIX.

Fidelity Strategic Income draws on the input of specialists across the firm’s impressive bond team. It typically invests in a mix of high-yield bonds and bank loans and emerging-markets debt. These risks are partially offset by positions in U.S. government and foreign developed-markets debt. A thoughtful strategy, strong team, and low fees underlie this fund’s appeal.

Loomis Sayles Bond is managed by a team of talented investors. This roster includes bond fund legend Dan Fuss, who recently won Morningstar’s Outstanding Portfolio Manager Award. Fuss pioneered this fund’s contrarian approach, investing in corporate bonds, foreign and emerging-markets debt, convertibles, and even the occasional common stock; the fund also typically sports considerable currency risk. Given its aggressive approach, the fund can be volatile and is vulnerable to big losses in risk sell-offs. Fortunately, the team’s eye for value and careful fundamental research have helped the fund to strong long-term returns.

Finally, PIMCO Income dominates the category with more than $120 billion in total assets. Dan Ivascyn and Alfred Murata draw on the depth and breadth of PIMCO’s powerful research effort. The fund stands out for historically large positions in nonagency mortgages, which have helped drive strong performance in a variety of different market environments. It also buys corporate debt, and emerging-markets and developed foreign sovereign debt, with a sprinkling of non-U.S. dollar currency bets. Even though the legacy nonagency market is shrinking, we believe that the team has plenty of tools at its disposal to maintain this fund’s edge.