Best Active Bond Mutual Funds

Dec 5, 2023 | Investing, Investment Portfolios, Newsletter

Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA, and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Tuesday, January 2, 2024. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Best Active Bond Mutual Funds

At MyPlanIQ, we hold the belief that excellent active bond fund managers can still outperform bond index funds effectively. In contrast to stock investing, fixed-income bond fund managers consistently demonstrate superior performance over index funds. This is not to suggest that equity stock fund managers cannot consistently outperform stock index funds; however, in general, achieving such outperformance is more challenging in stock investing.

In this article, we look at the latest performance of some of the best active bond mutual funds. We will have a separate article on active bond ETFs. 

Total return bond funds

We have consistently monitored and highlighted the most exceptional total return bond mutual funds in our income portfolios (refer to the Income Portfolios page). These mutual funds are actively managed by top fixed-income managers, each having earned at least the Morningstar Fixed-Income Manager of the Year award. Utilizing these no-load, no-transaction-fee mutual funds, available at major brokerages such as Fidelity, Schwab, Etrade, Merrill Edge, and Vanguard, we construct dynamic portfolios termed total return bond fund portfolios. These portfolios, live for more than a decade, have consistently outperformed even the best total return bond funds.

The following are the best 10 total return bond funds that are managed by the best fixed-income fund managers: 

Intermediate-Term Bond PBDAX PIMCO Investment Grade Corp Bd D
Multisector Bond PONAX PIMCO Income D
Intermediate-Term Bond PDBAX Prudential Total Return Bond A
Intermediate-Term Bond DLTNX DoubleLine Total Return Bond N
Intermediate-Term Bond FTBFX Fidelity Total Bond
Intermediate-Term Bond TGMNX TCW Total Return Bond N
Intermediate-Term Bond PTTAX PIMCO Total Return D
Intermediate-Term Bond MWTRX Metropolitan West Total Return Bond M
Multisector Bond LSBRX Loomis Sayles Bond Retail
Intermediate-Term Bond WABRX Western Asset Core Bond R

Morningstar changed its award categories in 2019 and no longer have fixed income manager of the year award category (see History of Morningstar Awards). We now utilize a combination of Morningstar’s analyst ratings (Gold, Silver, and Bronze) and our discretion to add/remove the candidate funds in the total return bond fund portfolios. In addition to the above 10 funds, we also look at the following funds: 

Among them, DODIX (Dodge & Cox Income) was a Morningstar fixed income manager of the year before. The three Baird funds are all managed by Mary Ellen Stanek, who won the Morningstar portfolio manager award in 2022. All of these funds have a $2,500 minimum investment requirement. They are not necessarily available in every major brokerage. 

Here are these funds latest returns, compared with VBMFX (Vanguard Bond Index Fund): 

Best Active Bond Fund Returns (as of 12/1/2023):
Fund Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
PBDAX (PIMCO Investment Grade Corp Bd A) 4.5% 3.0% -4.4% 1.3% 2.4% 5.2%
PONAX (PIMCO Income A) 6.4% 5.5% 0.3% 2.7% 3.8% 7.2%
PDBAX (Prudential Total Return Bond A) 3.6% 2.3% -4.4% 0.9% 1.9% 4.3%
DLTNX (DoubleLine Total Return Bond N) 1.8% 0.3% -3.8% -0.3% 1.2%  
FTBFX (Fidelity Total Bond) 3.0% 0.9% -3.4% 1.6% 2.0% 4.7%
TGMNX (TCW Total Return Bond N) 0.4% -0.9% -6.1% -0.6% 0.6% 3.4%
PTTAX (PIMCO Total Return A) 2.6% 1.4% -4.5% 0.5% 1.1% 3.2%
MWTRX (Metropolitan West Total Return Bond M) 2.3% 0.8% -4.8% 0.7% 1.2% 4.0%
LSBRX (Loomis Sayles Bond Retail) 3.8% 2.4% -1.9% 0.8% 1.3% 5.9%
WABRX (Western Asset Core Bond R) 1.6% -0.4% -6.2% -0.2% 1.0%  
DODIX (Dodge & Cox Income) 4.4% 3.1% -2.5% 2.3% 2.5% 4.4%
BIMSX (Baird Intermediate Bond Inv) 3.6% 3.0% -2.2% 1.5% 1.5% 3.1%
PRPIX (T. Rowe Price Corporate Income) 4.5% 2.8% -4.6% 1.6% 2.2% 4.9%
VBMFX (Vanguard Total Bond Market Index Inv) 2.3% 0.8% -4.4% 0.7% 1.2% 2.4%

Key observations:

  1. 15-Year Performance: for all funds, excluding Western Asset Core Bond (WABRX) and DoubleLine Total Return Bond (DLTNX) due to the absence of 15-year data, those with a 15-year return history have consistently outperformed the Vanguard Bond Index Fund (VBMFX). PIMCO Income (PONAX) delivered an impressive average compound annual return of 7.2%, while Loomis Sayles achieved 5.9%, surpassing VBMFX’s 2.4%. Notably, since its inception on 4/6/2010, DoubleLine Total Return (DLTNX) has consistently outperformed VBMFX with a total accumulated return of 155% compared to 129%. However,WABRX (Western Asset Core Bond R) has matched VBMFX since its inception in April 2010.
  2. 10-Year Performance:  over the last decade, three funds—PIMCO Total Return, TCW Total Return, and Western Asset—have shown underperformance compared to VBMFX. In contrast, PIMCO Income (PONAX) stands out once again as the top performer during this period.
  3. 5-Year Performance:  in addition to the previously mentioned three funds, DoubleLine Total Return (DLTNX) has also joined the group of underperformers. Once again, PIMCO Income stands out as the best-performing fund among them.
  4. 3-Year Performance:  Among the five funds that underperformed the benchmark VBMFX—T.Rowe Price Corporate Income (PRPIX), Western Asset, Metropolitan West, PIMCO Total Return, and TCW — PIMCO Income (PONAX) remains the top-performing fund.
  5. For the two corporate bond funds in the group, PIMCO’s PBDAX still slightly outperforms T.Rowe Price PRPIX. However, since their returns are somewhat similar, we believe adding PRPIX as an additional candidate can help the total return bond fund portfolios. 
  6. In summary, PIMCO Income emerges as a consistent winner across all periods, including YTD, 1, 3, 5, 10, and 15 years. Conversely, the DoubleLine Total Return Bond Fund (DLTNX), managed by the widely acclaimed ‘new bond king’ Jeffrey Gundlach, has struggled to match the benchmark, positioning itself in the lower tier of the group. DoubleLine fund has focused on mortgage back securities and that strategy hasn’t boded well with the recent market conditions in a rising rate environment. 

DoubleLine Total Return Bond Fund DLTNX vs Vanguard Bond Index Fund VBMFX:

The key takeaway from the analysis is that, even among these top-performing active bond funds, returns exhibit significant fluctuations across different periods. This underscores the importance of conducting regular reviews of their performance and considering necessary portfolio adjustments or switches when warranted. Staying vigilant and responsive to market conditions ensures that investment strategies remain aligned with current trends and performance expectations.

Total return bond fund portfolios

Let’s now look at the returns of our total return bond fund portfolios, compared with the best performer PIMCO income and the stable performance Fidelity total return bond fund FBNFX: 

Portfolio Performance Comparison (as of 12/1/2023):
Ticker/Portfolio Name AR Since 4/2/2007 Maximum Drawdown 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
Schwab Total Return Bond 8.4% 7.8% 0.5% 1.3% 4.6% 4.2% 6.8%
Fidelity Total Return Bond 6.1% 7.8% 0.4% 1.2% 4.5% 4.2% 6.5%
PONAX (PIMCO Income A) 6.2% 13.4% 5.5% 0.3% 2.7% 3.8% 7.2%
FTBFX (Fidelity Total Bond) 3.8% 17.6% 0.9% -3.4% 1.6% 2.0% 4.7%
VBMFX (Vanguard Total Bond Market Index Inv) 2.6% 19.1% 0.8% -4.4% 0.7% 1.2% 2.4%

PONAX inception date: 4/2/2007

Observations: 

  1. While PONAX outperformed the two total return bond fund portfolios over the past 15 years, it’s worth noting that it still underperformed the Schwab portfolio since its inception. Additionally, PONAX closely matched the Fidelity portfolio. This indicates the nuanced performance dynamics and emphasizes the importance of considering different time frames and inception points when evaluating the relative performance of investment portfolios.
  2. Over the past 3, 5, and 10 years, PONAX has consistently underperformed our portfolios, highlighting the more consistent and steady returns achieved by our investment strategies. This suggests that our portfolios have demonstrated resilience and effectiveness in delivering performance over these specific periods when compared to PONAX.
  3. Additionally, as illustrated in the above table, the portfolios show approximately half of the maximum drawdown compared to PONAX. This risk metric holds significance, especially considering that, for many fixed-income investors, a drawdown of 10% or more can be challenging to tolerate. Managing and mitigating drawdown risk is crucial in ensuring a more stable and predictable investment experience for investors in the fixed-income space.

The PIMCO Income Fund stands out as a major winner among all active bond funds. However, investors need to be keenly aware of its somewhat aggressive use of derivatives and exposure to foreign bonds. Additionally, while its maximum drawdown is not the worst among active bond funds, it can still be significant, reaching double-digit percentages. Moreover, the dynamic management team change adds another layer of concern.

In our opinion, these factors warrant regular reviews and a cautious approach, particularly during market distress or when the fund is underperforming. Essentially, a dynamic fund rotation strategy among this group of best active bond funds, as employed by our total return bond portfolios, remains the preferred investment methodology for establishing a stable and resilient fixed-income investment portfolio. This approach allows for adaptability in response to changing market conditions and risk factors.

Market Overview

As we enter the final month of 2023, market volatility has become more apparent. The uneven behavior in stock prices, particularly the dominance of the top 7 stocks (the ‘magnificent seven’) in driving S&P 500 total gains, creates a situation that will likely be resolved either by a correction in the top-performing stocks, potentially leading to a broader market downturn, or by investors rotating towards underperforming stocks, particularly in smaller-cap categories.

It’s noteworthy that small-cap stocks, as exemplified by the performance of IWM, have shown a more significant rally. This rotation suggests that investors may be seeking opportunities in stocks that have been underperforming, possibly in anticipation of a shift away from the dominant large-cap stocks that have driven market gains.

Investors should stay vigilant and adaptable in response to evolving market conditions, especially during periods of increased volatility. Assessing the dynamics of both large and small-cap stocks can provide insights into potential trends and opportunities in the market.

The mixed signals in economic indicators, as highlighted in the previous newsletter, underscore the complexity and uncertainty in the current economic landscape. While certain sectors or aspects of the economy may be performing well, others may be facing challenges or showing signs of weakness. The uncertainty calls for a systemic investment strategy. 

As always, we claim no crystal ball and we call for staying the course which is guided by the well defined and sound strategic and tactical strategies:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as we have emphasized numerous times when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years, preferably much longer, given the current high valuation. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later and preferably many more years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially during this time. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This is true time and time again.

Stock valuation has dropped, and now valuation is becoming less hostile. However, it is still not cheap by historical standards. For the moment, we believe it’s prudent to be extra cautious. However, how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of market is through dollar cost average (DCA), i.e., invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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