A Nimble High-Quality Bond Fund

The following is our latest Fund Analyst Report for Fidelity Investment Grade Bond 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.

Fidelity Investment Grade Bond is supported by experienced portfolio managers, robust quantitative resources, and a dedicated cohort of research analysts. Coupled with a reasonable fee, this instils confidence that the team has the tools to manage this core bond offering and results in a Morningstar Analyst Rating of Silver.

A two-decade veteran of Fidelity, Jeff Moore has helmed this fund since 2004. He was joined by Michael Plage, a manager on Fidelity Corporate Bond, in late 2016, and together they benefit from the strength of Fidelity's broader fixed-income efforts, including a robust cohort of analysts, sector-specific experts, and a cadre of dedicated quantitative-risk specialists and traders. Orchestrating up top, Moore and Plage nimbly adjust sector allocations and yield-curve positioning when they determine pockets of value within the fund's relatively constrained universe. In addition to its core U.S. Treasuries, agency mortgages, and investment-grade corporate credit holdings, the fund may hold up to 10% in below-investment-grade debt, though it has typically sat at 5% or less. Duration is kept roughly in line with the fund's Bloomberg Barclays U.S. Aggregate Bond Index benchmark.

Over Moore's tenure as a portfolio manager here (December 2004-July 2019), the fund’s 4.0% annualized return lagged the 4.2% of its index as well as the 4.1% median of a group of distinct intermediate core bond Morningstar Category peers (its new category home as of May 2019). These middling long-term results are a function of seesawed performance across more recent years. For example, a bullish stance on energy names hurt in 2015, but those same names lifted performance in 2016. Again, in 2017, allocations to Treasury Inflation-Protected Securities and high yield supported best-quartile performance relative to distinct intermediate core bond peers, but similar holdings hurt versus the same group in 2018. Having reduced TIPS exposure to zero, the team added to select corporate exposures, in particular financials, through the first seven months of 2019 and produced a 7.2% return that outstepped 90% of peers.

Performance Pillar: Neutral | by Emory Zink Aug. 25, 2019 The fund's mixed results over various periods contribute to a middling longer-term record relative to alternatives for core bond exposure and justify a Neutral Performance rating.

Over Jeff Moore's tenure as a portfolio manager here (December 2004-July 2019), the fund's 4.0% annualized return lagged the 4.2% of its Aggregate Index benchmark as well as the 4.1% median of a group of distinct intermediate core bond category peers (its new category home as of May 2019). Risk-adjusted returns over the period, as reflected in the fund's Sharpe ratio, trailed 70% of that peer group.

These middling long-term results are a function of seesawed performance. In 2007 and 2008, the portfolio's exposure to subprime mortgage-backed securities left it struggling, but thanks to an overweighting in battered corporate bonds and commercial MBS, the fund outpaced 80% of distinct peers in 2009. A bullish stance on energy names hurt in 2015, but those same names lifted performance in 2016. Again, in 2017, allocations to TIPS and high yield supported best-quartile performance relative to distinct intermediate core bond peers, but similar holdings hurt versus the same group in 2018. The team reduced TIPS exposure and added to corporate credit through the first seven months of 2019 and produced a 7.2% return that outstepped 90% of peers.

Price Pillar: Positive | by Emory Zink Aug. 25, 2019 The fund's no-load shares account for four fifths of assets and levy a fee of 0.45%, excluding certain investment-related expenses; this is less than the 0.6% median of similarly distributed peers across intermediate-term bond categories. Subsequently, the fund receives a Positive Price rating.

Process Pillar: Positive | by Emory Zink Aug. 25, 2019 A reasonable and repeatable approach, supported by the firm's deep research and a sharp set of proprietary tools, earns this fund a Positive Process rating.

In conjunction with a macroeconomic research group and specialists from across Fidelity's broader fixed-income cohort, portfolio managers Jeff Moore and Michael Plage assemble a broad view of the investment landscape. The comanagers work from this guidance, filtering opportunities to a set appropriate for the fund's mandated portfolio--adjusting sector allocations and yield-curve preferences accordingly--while duration is kept roughly in line with that of the benchmark Aggregate Index. With the portfolio contours in place, Moore and Plage then consult with a deep team of credit analysts, engaged in fundamental bottom-up valuation, to identify securities for inclusion.

In the wake of 2008's financial crisis, the firm's fixed-income group not only improved communication and accountability across its various teams but also invested heavily in operations, developing a bevy of tools for portfolio managers to slice and dice a broad portfolio's risks and identify opportunities in individual credits and mortgage pools. These tools enable multifaceted views of risk in the portfolio and, when coupled with the insights and efforts of the fund's dedicated quantitative analyst, strengthen the process.

Following the May 2019 retirement of the intermediate-term bond Morningstar Category, this fund's profile landed it squarely in the newly formed intermediate core bond category, though the fund has modest flexibility to hold out-of-benchmark fare. For example, the portfolio managers may invest up to 10% in non-investment-grade securities, but more practically, that exposure has historically remained in the low single digits and sat at 3% as of June 2019. Collateralized-mortgage obligations and emerging-markets debt (0.6% and 0.4%, respectively, as of June 2019) have occupied slivers of this portfolio at various points in time and are employed without distorting the fund's core bond profile.

Relative to its Aggregate Index benchmark, 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, its roughly 40% exposure to corporate credit sat well above the benchmark's 25% stake and roughly 10 percentage points above its typical peer's. Views on a maturing credit cycle led the team to pare back those holdings to as low as 25% in late 2017, and the allocation remained beneath 28% for 2018 before noticeably increasing to 34% by mid-2019, as the managers opportunistically added what they consider recession-resilient securities.

People Pillar: Positive | by Emory Zink Aug. 25, 2019 Experienced leadership and a robust pool of researchers, analysts, and traders support the fund's Positive People rating.

Jeff Moore has led this fund since 2004 and was joined by Michael Plage in late 2016, following a brief period of comanagement with Pramod Atluri, who departed for an opportunity with a competitor. Both portfolio managers began their careers at the firm as credit analysts and have spent significant time at Fidelity--for Plage, it has been a little over a decade and for Moore more than two decades. Together, they sit on the core bond desk and benefit from collaborative discussions with Ford O'Neil, another manager whose levelheaded record instills confidence.

Expansive resources from across Fidelity's broader fixed-income efforts provide the comanagers with research and guidance to support thoughtful portfolio positioning. Sector-focused teams for mortgages, municipals, and credit--many that run sector-specific funds that have historically received Morningstar Medals in their own rights--all contribute to discussions on relative valuation, while a robust cohort of roughly 50 analysts generate fundamental analysis and provide security recommendations. Additionally, quantitative analysts are assigned to teams and sit next to relevant portfolio managers, as do traders, who provide swift feedback on flows and sentiment in the bond markets.

Parent Pillar: Positive | July 6, 2018 Fidelity isn't without challenges but remains well positioned enough to compete in a changing industry. It earns a Positive Parent rating. The firm's diversified asset mix has shielded it from steady outflows from its active U.S. equity funds, with its taxable bond, international equity, and low-priced index offerings attracting assets. Its revamped target-date offerings have improved, and in 2018 the firm plans to launch an additional series combining active and passive funds to better compete in an area where investor interest has grown.

Attracting and retaining talented investment professionals is more important than ever. The equity division came under fire in 2017 amid reports of sexual harassment and a hostile work environment, leading to portfolio manager dismissals and a change in leadership. While Fidelity addressed the personnel issues and is working to improve collaboration through weekly team meetings, more-open floor plans, and improved feedback systems, it remains to be seen how the division may incorporate team-based elements into the legacy star-manager system. Meanwhile, the fixed-income division remains in steady hands following the retirement of a longtime CIO. While the bond analyst and manager ranks have seen more change than usual lately, the team-oriented structure of its investment-grade and municipal offerings helps minimize the impact of departures.