4 Bond Funds to Help You Stay Adaptable

Bond investors who had been waiting for an interest-rate cut breathed a sigh of relief in September 2024 when the Federal Reserve cut the target for its overnight lending rate by 50 basis points. Although lower interest rates reduce the amount of income that investors can expect from new bond issues, the market reprices the face value of outstanding fixed-rate debt to match those lower rates, which means their bond prices go up. All else equal, the longer a fixed-rate bond’s maturity, the more its price increases when rates fall.

Mutual fund flows suggest investors have been anticipating falling rates for months. Whereas short-term bond funds of different stripes have experienced outflows this year, intermediate core bond funds received more than $65 billion of new money for the year to date through October, more than any other bond Morningstar Category during the same period.

But betting on interest-rate movements is tough and not a durable investment method. A better practice than trying to forecast interest rates is to allocate money to proven strategies with the flexibility to adjust to changing market expectations and opportunities. Here are four multisector bond funds that fit the bill.

JPMorgan Income JGIAX, which has a Morningstar Medalist Rating of Bronze, typically enjoys a yield advantage versus most category peers, thanks to the portfolio’s emphasis on higher-income areas, including junk-rated corporates, mortgage-backed securities, and asset-backed securities. The fund’s managers are well-versed in multiple corners of the bond market, and their supporting resources include 30 credit analysts focused on high-yield and securitized debt, which dovetails nicely with the fund’s multisector approach. While short-term outcomes have trailed rivals, its 3.8% annualized return over the 10 years through November 2024 beat roughly 70% of category peers.

Silver-rated Fidelity Strategic Income FADMX relies on the firm’s formidable group of specialists and strong bottom-up credit research capabilities to invest across a wide-ranging menu. While the portfolio is typically split evenly between investment-grade and below-investment-grade bonds, allocations span US government and corporate debt, floating-rate high-yield debt, and local emerging-markets debt. Managers here prefer strong credit positioning over sweeping bets on potential interest-rate movements. While this fund’s three-year record is mediocre, it has been a top-third performer over the past five years, and we think the latter record is more representative of what investors can expect here for the long term.

Gold-rated Pimco Income PIMIX has the best 10-year record of the three funds here that have a record that long. Its 4.2% annualized return over the decade through November 2024 surpassed 90% of category peers. A $170 billion asset base presents a challenge for manager Dan Ivascyn, but the team’s deft use of the firm’s unparalleled resources to generate consistent payouts still makes this fund an appealing option. For example, Pimco’s market clout has enabled it to scoop up large chunks of older mortgages from other banks, even as the legacy securitized market has shrunk. While nonagency residential mortgages have been a key contributor to this fund’s success, exposures to other securitized sectors, corporate debt, emerging markets, and foreign currencies have also supplied additional returns.

Silver-rated Hartford Strategic Income HSNIX has rewarded investors who can tolerate higher volatility. During credit rallies, its bias toward more credit-sensitive corners such as high-yield bonds, emerging-markets debt, and bank loans can propel performance, but it can also lag in challenging credit environments. Its typically longer duration posture can also sting in more rate-sensitive environments such as 2022. Still, its record is solid over the long term. Its 4.0% annualized return over the past 10 years through November 2024 bested close to four fifths of all peers.

A version of this article first appeared in the November 2024 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.