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4 of the Best Wide-Ranging Bond Funds

Performance has been all over the map in 2015.

This has been an interesting year for multisector funds. They are wide-ranging funds with lots of flexibility. If that sounds like nontraditional or unconstrained bond funds, there’s one big difference: Multisector funds have actually generated strong returns rather than hype. Their five-year returns are double those of nontraditional bonds.

Rather than making big macro and duration bets like those common among managers in the non-traditional-bond Morningstar Category, multisector funds follow a more traditional, if wide-ranging, approach to bond management. They differ from the core bond Morningstar Category of interme­diate bonds by having 35%–65% in below-investment-grade debt. They also tend to invest more overseas, including in emerging-markets debt. In 2015, multisector funds have had rather widely dispersed returns because some regions and currencies have had strong gains while others are flat or negative.

The first story is currency. A rising dollar has stung the funds that invest in debt denominated in foreign currency. Equity exposure is another story, as some funds dabble in equity--a good tactic last year, a painful one this year. Let’s look at four of our favorite multisector funds in order of their 2015 returns.

 PIMCO Income (PONDX
)
Dan Ivascyn has made this fund, which has a Morningstar Analyst Rating of Silver, a bright spot amid all the Bill Gross controversy. The fund continues to perform brilliantly, and investors keep sending money Ivascyn’s way even as they redeem their shares of  PIMCO Total Return (PTTRX). The fund is up 2.33% for the year to date through Sept. 1, and that tops 90% of its peers. The fund also ranks in the top 5% of its peer group over the past three- and five-year periods.

Ivascyn has been bullish on the dollar, and that has helped most of the time in 2015. But over the longer term, nonagency mortgages have been a key part of the story. The fund is about 40% in nonagencies. These are mortgages without government backing that got stung during the credit crisis and carry higher yields and additional credit risk. Ivascyn has largely avoided government mortgages and rounded out the portfolio with high-yield, emerging-markets, and foreign developed-markets debt.

 Fidelity Strategic Income (FSICX
)
This Silver-rated fund is just barely in the black with a 0.2% year-to-date return. The fund has been in the middle of the pack under Joanna Bewick for the past three- and five-year periods, but its longer-term results are strong. Unlike its peers, this fund doesn’t have much flexibility. The fund’s neutral weighting is 45% high-yield/floating-rate, 25% U.S. govern­ment debt (recently split 75% Treasuries/25% mortgages), 15% emerging markets, and 15% foreign developed markets. The fund lost 11.4% in 2008, which, although painful, left it ahead of two thirds of its peers. 

 T. Rowe Price Spectrum Income (RPSIX
)
Equities have stung this Silver-rated fund this year, and it is 1.7% in the red. The fund has an 11% equity weighting via  T. Rowe Price Equity Income (PRFDX), which is itself down 11% for the year to date. Manager Charles Shriver uses T. Rowe Price funds to allocate tactically among 14 T. Rowe funds including emerging-market bonds, high-yield, bank loans, Treasury Inflation-Protected Securities, mortgages, and foreign debt. That gives shareholders greater diversification than most funds in the group, but it comes at some cost. 

 Loomis Sayles Bond (LSBRX)
Dan Fuss, Elaine Stokes, and Matthew Egan typically invest a lot outside the United States in nondollar debt, and that has hurt so far this year as commodity-related currencies including the Canadian dollar have been particularly hard-hit. The Gold-rated fund is down 5% for the year to date. Long-term results are stellar, though, as Fuss has proved to be a skilled value investor. Fuss has stuck to his contrarian strategy, adding to the fund's high-yield stake amid last winter’s energy sell-off. However, while that move may ultimately pay off, the fund is struggling this year thanks to its 30% weighting in nondollar bonds and a slug of equities.

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Russel Kinnel has a position in the following securities mentioned above: PTTRX, LSBRX. Find out about Morningstar’s editorial policies.