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Morningstar FundInvestor
January 2016
The Year in Bond Funds
Senior analyst Sarah Bush filed this report on bond
funds in
2015
: After a banner year for the investment-
grade U.S. bond market in
2014
,
2015
yielded decidedly
anemic results. The Barclays U.S. Aggregate Bond
Index gained just
0
.
55%
in
2015
. That flat return
obscured a fair amount of volatility in the broader
bond markets, however, and many Morningstar
Categories fared far worse. Notably, the high-yield
bond category, down
4
.
1%
for the year, was on pace
to suffer its first annual loss since
2008
.
Here, we look at the biggest bond fund stories of
2015
:
Fed Watch
All eyes were on the Fed in
2015
as it approached its
first planned rate hike since
2006
. The Fed finally
delivered after its Dec.
16
meeting, raising its target
federal-funds rate by
25
basis points.
The Fed only directly controls short-term rates,
however, and history suggests that what happens to
the rest of the bond market in the wake of a fed-
funds shift depends on a number of other factors. Since
the end of
2014
, other short-term rates have risen
noticeably in line with market expectations of a rate
hike, but long-term bond yields are close to where
they started the year. As a result, while funds in the
rate-sensitive intermediate-term government cate-
gory have seen only meager returns in
2015
, most of
its funds finished the year in the black.
Energy-Driven Rout in the High-Yield Markets
How a manager approached the energy sectors turned
out to be a big driver of success or weakness over
the course of the year.
Franklin High Income
FHAIX
,
American Funds American High-Income
AHITX
,
and
Western Asset High Yield
WAHYX
all faced sub-
stantial losses, thanks in part to struggles in their
energy and commodity-related holdings. Meanwhile,
outside of those hard-hit sectors, losses were far
more moderate. Indeed, the funds that fared the best
focused on higher-quality fare and/or sidestepped
the hardest-hit sectors.
Vanguard High-Yield Corpo-
rate
VWEHX
, long one of the category’s most
conservative funds with its focus on the higher-rated
tiers of the junk market, held up relatively well.
Another winner, somewhat surprisingly, was
Fidelity
Capital & Income
FAGIX
. Although the fund has
historically been one of the high-yield category’s most
aggressive entrants, it avoided the worst through
the help of manager Mark Notkin’s decision to lighten
up on the lowest-rated credits and to run the
fund with a significant underweighting to energy.
A Strong Dollar Dominates
The other way for bond funds to lose money in
2015
was via the currency markets. The U.S. dollar
logged big gains against both developed-markets—
including the euro and Canadian dollar—and
emerging-markets currencies. Brazil’s government
debt was downgraded to junk status amid con-
tinued fiscal woes, and the Brazilian real was one of
the world’s worst-performing currencies.
So, while funds fully hedged back to the U.S. dollar,
such as
PIMCO Foreign Bond (USD-Hedged)
PFORX
,
held in relatively well, those with large foreign-
currency exposures suffered. Indeed, one of the worst-
performing funds in the category was the unhedged
version of
PIMCO Foreign Bond (Unhedged)
PFUIX
.
Funds with large exposures to emerging-markets
currencies also had a particularly rough year:
Legg
Mason Brandywine Global Opportunities Bond
GOBIX
, which featured a sizable allocation, including
to the Mexican peso, tumbled
8
.
6%
in
2015
.
A Hard Benchmark to Beat
For the second year running, the Barclays U.S.
Aggregate Bond Index proved a worthy adversary. The
broad fixed-income benchmark’s
0
.
55%
gain landed
it well ahead of the
0
.
2%
return for the median fund
in the intermediate-term bond category.
The winners among that group in
2015
included
DoubleLine Total Return Bond
DBLTX
and
TCW Total
Return Bond
TGLMX
, both of which have large
stakes in agency and nonagency mortgages. Mean-
while, the team behind
Western Asset Core Bond
WATFX
and
Western Asset Core Plus Bond
WACPX
acquitted itself well with carefully timed adjust-
ments to duration and yield-curve positioning; a modest
allocation to nonagency mortgages also helped.
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