There was a time when fund investors would settle for any old bond fund. Often, investors would just buy bond funds from one of the firms where they had a stock fund account, without digging to see if they had the expertise to do a good job.
Fortunately, that has changed. Falling interest rates and a bear market have generated much more interest in bond funds, and many investors are becoming more selective in choosing bond-fund managers.
Look no further than PIMCO Total Return for evidence. This fund has become the world's largest mutual fund as a legion of investors and financial planners have been won over by one of the premier bond firms in the country. If you pay much attention to bond funds, you probably already know that Vanguard, Fidelity and Pimco offer compelling combinations of skilled management, low costs and good risk controls. These are the three most important things to look for in a bond manager. In general, you could save a lot of time by starting your bond-fund search with those three firms because you'll probably find what you need at one of them.
Still, there are some other great bond shops that deserve attention, too. Like Pimco, they have long served demanding institutional investors, such as pension funds. On the mutual fund side, they might look like small fry with just a couple of billion under management, but they actually run much more money than that on the institutional side. That's important, because it means they have the depth of research, skilled investment professionals and economies of scale to run great bond funds. Today, I'll highlight some of the best.
BlackRock: This is one of the biggest bond managers around, but they've remained an unknown to most individual investors. Until recently, their funds for retail investors were a tad pricey, so there was no real incentive to get to know them. However, they cut their expense ratio on four of their best funds last year, so it's worth a look even if you can't get into the institutional shares.
BlackRock makes minor interest-rate bets, but their emphasis is on sector and issue selection. The firm has an array of bond funds, including municipal, high-yield and core taxable bond offerings.
One of their best is BlackRock Core Bond Total Return, which has beaten 90 percent of its peers over the trailing five- and 10-year periods. The institutional shares charge 0.55 percent a year and the A shares go for 0.90 percent.
Western Asset: Western Asset sometimes takes on a little more risk than its rivals, but the firm gets a lot of mileage out of it. At Western Asset Core, for example, the fund tends to have a touch more credit risk and interest-rate risk than other intermediate-term funds.
However, management doesn't make big bets on individual companies, and the research staff is quite good. Like BlackRock, this fund has put up top-decile returns. It comes with a $1 million minimum investment, but there's a separate share class that charges 0.75 percent and is available for just $2,500.
Weiss, Peck & Greer:This firm is even more cautious on interest-rate bets than BlackRock and Western Asset. At WPG Core Bond, sector rotation and security selection are the name of the game. Management keeps the portfolio broadly diversified so that it won't get torpedoed by a couple of bad bonds. Lead manager Dan Vandivort has done a great job of guiding the fund through a rocky time for corporate bonds to put up outstanding returns.
Loomis Sayles: If you've got your core bond holdings all set and are looking to round them out with a small position in a different kind of fund, Loomis Sayles Bond is a fine choice. Co-manager Dan Fuss has put up a great track record at this fund since its 1991 inception. This one is a high-octane fund that can invest in darn near anything. Fuss takes a contrarian/value approach and likes to buy foreign bonds or U.S. junk bonds when others are bailing out. That's quite risky, yet the fund has finished only one year in the red. You can get this fund's institutional shares through no-transaction-fee supermarkets. It charges 0.75 percent.