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4 of the Best Bond-Pickers

These active managers have been consistently successful in the fixed-income market.

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The article was published in the November 2021 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.

Actively managed fixed-income funds can generate outperformance from a variety of sources. Examples include sector rotation, which is the skillful shifting of assets across sectors such as mortgages, corporate bonds, and U.S. Treasuries, and a persistent overweight in credit-sensitive assets, which works during periods of stability but can come back to bite funds during corrections. A third example is issue selection, how portfolio managers choose one bond over another. Given the sheer size of the fixed-income universe and the time-intensive nature of issue selection, being consistently good at it can be a rare thing. Here are some of the best bond-pickers among Morningstar Medalist funds.

T. Rowe Price Floating Rate (PRFRX) is among the best offerings in the bank loan Morningstar Category, earning a Morningstar Analyst Rating of Gold for most of its share classes and a Silver rating for its more expensive advisor share class. The strategy has earned those ratings by the merits of an extensive research team and its loan-picking abilities. The portfolio managers pick their spots carefully, focusing mostly on BB and B rated loans while remaining choosy toward CCC loans. Returns in the bank-loan category are notoriously clustered, and it's difficult for strategies to stand out without resorting to excessive risk-taking, but this team has managed to do just that. One of its distinguishing characteristics is its conviction, with its top holdings regularly accounting for more than 20% of assets. Selective filtering of the bank-loan market and strong conviction in the loans that are selected have been a powerful combination here over the long term.

Pimco Investment Grade Credit Bond (PIGIX) benefits from its veteran lead manager and an impressive group of corporate-bond specialists. Pimco's cadre of over 50 corporate credit analysts gives the firm a coverage capacity that few peers can match, allowing it to do deeper research and cover a broader swath of the investment-grade corporate market. This especially shows through in the team's coverage of the financials industry, which has long been a specialty at Pimco. Over the past nine calendar years, the financials team has added value in seven of them. This consistency has come to be a hallmark of the fund, though it has hit a rougher patch relative to peers in the corporate-bond category. Regardless, the fund's qualities remain intact, and its cheapest share class earns a Silver rating.

Fidelity Tax-Free Bond (FTABX) is among the best options in the muni-national long category and earns a Gold rating. While the group managing this strategy has gone through some transitions over the past few years, it remains supported by an experienced bench of analysts and associates that wield substantial proprietary research tools and capabilities. The team is traditionally cautious, preferring to let its selection abilities within higher-rated parts of the muni market distinguish returns, rather than adding extra volatility through credit risk or leverage. Indeed, the team analyzes bonds from a variety of angles: credit quality, dislocations along the maturity spectrum, and unique structural traits or financial flexibility that the market doesn't fully appreciate.

Dodge & Cox Global Bond (DODLX) is another standout offering from this San Francisco-based asset manager. Dodge & Cox has distinguished itself as a bond-picking firm, and this fund is no different, with an approach built on deep fundamental research applied to a global opportunity set. While the size of that market can be overwhelming, the team sticks to what it knows best: corporate credit, which typically accounts for half of portfolio assets. The rest is distributed across government and securitized debt, though performance attribution indicates that the team's issue selection has been the most significant contributor since the Gold-rated fund's 2014 inception.

Brian Moriarty does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.