(PUB) Investing 2016

15

January 2016

Morningstar FundInvestor

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. K

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 . 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. Here, we look at the biggest bond fund stories of 2015 :