The multisector bond Morningstar Category groups together funds that diversify their assets across fixed-income sectors. Most include exposures to sectors like high yield and emerging markets that would make them too aggressive for a traditional investment-grade-focused category, and they aim for higher returns than core offerings while still enjoying more diversification than those focused solely on riskier sectors. The multisector category is not divided into long- and short-term offerings, though, which is worth remembering when evaluating peer group rankings because falling interest rates greatly advantage the former and rising rates the latter.
Even over a longer stretch, a fund’s interest-rate sensitivity can make a big difference in its peer group showing. Over the past five years through December 2024, for example, Intrepid Income’s ICMUX 7.25% annualized gain was nearly 3 times the 2.55% multisector bond median and placed first out of nearly 90 distinct peers based on the cheapest share class of each. Intrepid’s focus on junk debt, one of the better-performing bond sectors, and its ability to avoid defaults in its highly concentrated portfolio figured into its category-topping showing, but so too did its preference for debt with shorter remaining maturities versus category peers without that preference.
Historical returns and periodic duration positioning can help illustrate the point. Calculated in years, duration estimates a bond fund’s price sensitivity to a 1% move up or down in market yields. Using linear regression to analyze a scatterplot of fund return and duration data for the category shows a statistically significant relationship between each fund’s duration positioning and its five-year return through December 2024. Even though that period included both falling rates, as in 2020, and rising rates, as in 2022, the whole stretch disadvantaged longer duration funds such that for each additional year of average duration a fund lost about 49 basis points in annualized performance. Intrepid Income’s duration positioning for the entire period wasn’t available, but its 2.2-year duration in December 2024 then put it near the multisector bond category’s shortest decile.
This relationship between fund returns and duration shows the pitfall of picking a fund based solely on its past performance. Even if a shorter-duration fund’s management team continues to do its job well, a preference that enjoyed a tailwind in one period could prove a headwind in the next. Investors would do better to take a holistic view and pick a fund based on factors such as its risk profile, and how it would fit within a broader portfolio. One of the three multisector bonds highlighted below would make a good starting point, each of which has a Morningstar Medalist Rating of Silver.
Longtime manager Ford O’Neil and his comanager Adam Kramer share asset-allocation duties for Fidelity Strategic Income FADMX. With an intermediate duration profile of 4.5 years on average over the past five years, its portfolio generally hovers around a balanced 50/50 allocation between investment-grade and below-investment-grade debt. The former consists of US government fare, corporate credit, and foreign developed-markets debt, while the latter consists of US high-yield credit and broadly syndicated bank loans; the portfolio’s emerging-markets debt bucket typically spans both sides of the credit spectrum.
Comanagers Campe Goodman, Robert Burn, and Joseph Marvan keep Hartford Strategic Income’s HSNAX duration longer than most rivals to balance out the portfolio’s credit risk. Benchmarked against a one-third split each of the Bloomberg Intermediate US Treasury, Bloomberg Emerging Markets USD Sovereign BBB+ and Lower, and Bloomberg High Yield 2% Issuer Capped indexes, the strategy balances hefty stakes in high-yield bonds, emerging-markets debt, and bank loans with a moderate mix of investment-grade corporates, US Treasuries, and agency and nonagency mortgages.
Pimco Income PONAX, a USD 171 billion fund that is more than 7 times larger than its next biggest category competitor, has typically carried a shorter duration profile because of its appetite for securitized fare, including nonagency mortgages. The strategy will also invest in other higher-income sectors, such as high-yield corporates and non-US bonds. Its size poses challenges, but with comanagers Dan Ivascyn, Alfred Murata, and Joshua Anderson, it remains one of the category’s more compelling options.
This article first appeared in the January 2024 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.