July 3, 2002 — Against a backdrop of corporate scandal, declining short-term interest rates, a weakening dollar and a lackluster economy, the average high-quality bond fund eked out a total return of barely over 2% for the first half of 2002. For managers whose funds beat the average, the right calls made all the difference.
Funds whose holdings included large doses of government bonds, especially some of the agency bonds, such as Fannie Maes and Freddie Macs, found their holdings rise in value as nervous investors, wary of corporate bonds, bid up prices in the quest for safety.
Placement on the yield curve was also important as short-term rates went down and longer-term rates edged up. Todd Ahlsten, who helps manage the Parnassus Income Trust Fixed Income Fund (PRFIX), an intermediate bond fund, credits the fund’s average duration of about seven years as having a significant role in the fund’s 3.7% return for the first half. Other factors included significant holdings in government agency issues and rallies in some undervalued corporate bonds.
And similar to the equity markets, funds of managers who look for value bubbled up to the top. A case in point is Loomis Sayles Inv Tr Investment Grade Fixed Income (LSIGX), which managed an outsized return of 6.4% for the first half of 2002 by finding undervalued credits, especially in foreign currencies.
Xavier Urpi, co-manager of the Accessor Funds:Intermediate Fixed Income Fund (AIFIX), thinks the team’s correct calls on bond quality and sector bets, starting in the middle of last year, were significant in helping the fund achieve a return of 5.4% for the period through June 28. The fund has avoided technology altogether; and, anticipating a weak economy in 2002, the managers decided to overweight high-quality credits in strong sectors such as utilities and financial. Urpi also thinks that positioning the fund’s holdings between five- and 10-year maturities paid off in the first half.