11 Great Core Bond Funds
These Gold-rated intermediate-term bond funds can provide ballast to a portfolio no matter your life stage.
Funds in the intermediate-term bond Morningstar Category are a favorite among investors: According to our latest fund flows report, these funds raked in $15.5 billion in assets last month. Moreover, intermediate-term bond funds as a group boast $1.47 trillion in assets, making the category the third largest behind large-growth and large-blend.
The elite status makes sense: By dedicating a sizable chunk of your fixed-income allocation to such funds, your portfolio will be better positioned to withstand bond-market shocks from interest-rate increases or credit-quality scares. Plus, you'll get the diversification benefits that bonds can offer an equity-heavy portfolio.
Investors seeking core bond funds for their portfolios can begin their search with this shortlist of funds. Each fund listed here earns a Morningstar Analyst Rating of Gold. Funds that earn Gold ratings are expected to outperform during a full market cycle.
Here's a little bit about a few of the funds from the list.
Baird Aggregate Bond (BAGIX)
"A cohesive team, proven and deliberative process, and low fees position Baird Aggregate Bond for long-term success, supporting an upgrade of the strategy's Morningstar Analyst Rating to Gold from Silver.
"Lead manager and Baird CIO Mary Ellen Stanek heads a veteran team of five portfolio managers that have worked at Baird for nearly two decades. They are supported by five additional portfolio managers, 12 dedicated analysts, and a handful of other tenured players that assist with research and risk management. While this outfit is somewhat smaller than other firms', it sticks to investments that it can research thoroughly.
"Stanek and team curate a portfolio of mainly investment-grade corporate credit, securitized debt, and U.S. government bonds--the primary sectors of the Bloomberg Barclays U.S. Aggregate Bond Index benchmark. The team matches the fund's duration to the index's, while avoiding derivatives, leverage, and esoteric fare, and using high yield minimally.
"For most of the strategy's life, it has maintained persistent overweightings to corporate and securitized bonds and downplayed U.S. Treasuries, which has given it a slight yield advantage over the benchmark. To balance that additional credit risk, the team emphasizes diversification and position sizing as risk controls. High-conviction bets on benchmark names are kept within 75 basis points of the benchmark's sizing, and industry over- and underweightings are kept within a handful of percentage points. That risk-aware approach prevents the fund from getting thrown off course by any one bet.
"The strategy's slight overweighting in credit can cause it to underperform its Treasury-heavy index when credit sells off, but attentive risk management has kept it from major missteps. The fund's low fees also help discourage outsize risk-taking. From its inception in 2000 through January 2019, it returned 5.2%, landing in the intermediate-term bond category's best quartile."
--Alaina Bompiedi, analyst
Metropolitan West Total Return (MWTIX)
"Metropolitan West Total Return Bond benefits from a seasoned team and a time-tested investment approach, supporting a Morningstar Analyst Rating of Gold.
"Generalist portfolio managers Tad Rivelle, Laird Landmann, Steve Kane, and Bryan Whalen are backed by a cadre of specialists, analysts, and traders across the firm's securitized, credit, and government/rates teams. The generalists position the fund according to their views on the credit cycle and valuations. For instance, the team reduced the fund's corporate exposure to an all-time low of 7% in early 2008 given its view on the sector's frothy valuations but then bargain-hunting as spreads widened later that year. More than doubling that stake led to peer-topping results in the 2009 rally.
"This fund's positioning tends to shift dramatically early in the credit cycle as the managers take advantage of rock-bottom valuations in the credit and securitized spaces. The managers gradually dial down the fund's risk in the mid-to-later stages of the cycle. This approach has resulted in middling performance over the past five years compared with more intrepid rivals, particularly those willing to own more high yield. Still, the team has taken advantage of some valuation-drive opportunities. For instance, it increased the fund's investment-grade corporate stake to 35% from 27.5% at the start of 2018, as it took advantage of the sell-off early in the year and found more-recent opportunities in beaten-up names like Ford, GE and Mexican quasi-sovereign Pemex. The team has also been adding more interest-rate risk in the recent rate sell-offs, gradually extending the fund's duration from 0.3 years short of the Bloomberg Barclays U.S. Aggregate Bond Index's in mid-2017 to 0.2 years long as of October 2018.
"Though not eye-catching lately, the fund's long-term performance has been impressive thanks to the generalists' discipline around valuations and ability to take advantage during sell-offs. The sector teams' ability to find value in less-trafficked pockets of the fixed-income market also bodes well for this fund's future."
--Karin Anderson, associate director of fixed-income strategies
Western Asset Core Bond (WATFX)
"It is difficult to find a serious weakness in Western Asset Core Bond, 2018 performance notwithstanding. We maintain its Morningstar Analyst Rating of Gold.
"The fund stumbled a bit in 2018 and, uncharacteristically since 2008, posted a bottom-quartile performance through Oct. 31, 2018. A relatively long duration and some emerging-markets exposure were the main culprits. Still, Western Asset is one of the premiere fixed-income shops in the industry and commands research resources commensurate with this status. It is one of the better-staffed asset managers among its competitors.
"This large and diverse team is tasked with contributing to Western's investment outlook and executing it within the constraints of its various offerings. Under the leadership of CIO Ken Leech, senior members of the investment team comprise a U.S. broad strategy committee that sets the firm's positioning on interest rates, the yield curve, and sectors, among others. Once these themes are set, portfolio managers use them as guides to incorporate the work of sector heads and individual analysts in portfolio construction, along with the use of Western's proprietary risk system, developed between 2010 and 2016. That system is notably important here given its utility in helping this fund's managers to maintain diversification among its sources of risk.
"Western's difficulties during the 2008 financial crisis served as a wake-up call. The firm retooled its approach thereafter, and its macro forecasts have more often than not hit the mark. Apart from its 2018 weakness, which was of a degree of magnitude smaller than a decade ago, this fund's performance has generally been excellent since then. The fund's annualized 10-year return of 6.48% as of Oct. 31, 2018, beat its average unique peer in the intermediate-term category by more than 150 basis points, and the Bloomberg Barclays U.S. Aggregate Bond Index by some 250 basis points. That's a remarkable result given that, unlike many of its category peers, the fund's mandate precludes this offering from buying below-investment-grade paper."
--Maciej Kowara, senior analyst
Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.