Andrew Dudley isn’t trying to make his fund, Fidelity Advisor Intermediate Bond/Instl Fund (EFIPX), the best in its category. Nor is he trying to give his “shareholders the highest income component.” But, in the wake of a somewhat stabilizing bear market, and in the midst of the “bonds are king” movement, Dudley is simply following his instincts (along with Fidelity’s investment style requirements) to outperform his benchmark, the Lehman Brothers Intermediate Government/Credit Bond Index.
“We do not manage the yield,” he says. “But I am trying to deliver second-quartile consistency over a three- and five-year time frame.”
Fidelity’s principal investment strategies hold true throughout all of its bond funds, and include investing at least 80% of assets in investment-grade debt securities; managing the fund to have a similar overall interest rate risk to its benchmark; maintaining a dollar-weighted average maturity between three and 10 years; hewing to diversified asset allocations; and analyzing a security’s structural features and current pricing, trading opportunities, and credit quality of its issuer.
As vice president and portfolio manager for Fidelity Investments, Dudley began managing EFIPX in late 1999. He is also responsible for Fidelity Short-Term Bond Fund, Fidelity Advisor Short Fixed-Income Fund, and Fidelity Ultra-Short Bond Fund. And while dividing his time and his talents among these four funds may seem challenging to some, EFIPX has earned four stars from S&P and five from Morningstar.
“There are no bad bonds, just bad prices,” is the motto Dudley says he keeps in mind when reviewing potential investments. The ultimate goal is to create “a balance of both credit and sector allocations.”
For the 10-year period ended August 30, 2002, EFIPX had an average annualized total return of 6.6%, versus a total return of 7.4% for the Merrill Lynch Corporate & Government Master Index, and an average annualized total return of 6.6%, compared with a total return of 6.3% for all Intermediate-Term High Quality funds, according to S&P. On a total return basis, this fund ranked 150 within the entire universe of 480 funds in the Domestic Taxable Fixed Income category, and ranks 35 within the entire universe of 125 funds in this peer group.
We spoke with Dudley on September 11 as the lights in his Merrimack, New Hampshire, office temporarily blacked out. “I hope there isn’t some big mushroom cloud outside,” he said. But as the generators clicked on, he brightened up, relating where his fund fits within its category, Fidelity’s management style and investment requirements, and how his benchmark nearly dictates every aspect of this fund.
S&P categorizes your fund as an intermediate-term, high quality fund, and Morningstar categorizes EFIPX as a short-term bond fund. Which is more accurate? The space that this fund lives in is the one- to 10- year maturity space. And that is defined by the benchmark (Lehman Brothers Intermediate Government/Credit Bond Index) that we explicitly line ourselves up against. I find it difficult to categorize this fund as a short-term bond fund. I find the very broad Morningstar category to be a bit misleading. If I had to line it up, I’d go by the risk numbers. Think of it in terms of interest-rate risk; the interest-rate risk on a short-term bond is roughly 1.8 years. Interest-rate risk on this fund is about 3.6, given where interest rates have gone. And the interest-rate risk on the broad-market funds tends to be between four and five years, depending on where the aggregate index is. Just on those numbers alone, it is closer to the aggregate and the broad market products than to the short products.
This fund’s inception was in 1984. How has it changed over time, and how have you specifically molded it to your own style? Around 1995 and 1996, all of Fidelity’s products took on a very predictable profile that lined up all the funds with a very clean and understandable benchmark. This was done so shareholders could evaluate the risk from an interest-rate and credit-risk standpoint just on the basis of that benchmark. On top of that, keeping in mind a reasonable risk profile wouldn’t allow us to stray too far away from what the shareholders thought they were getting in terms of interest-rate risk, credit risk, and repayment risk.
In terms of style, this fund is managed in a very risk-controlled kind of modest incremental strategy. We are managing to a highest total return relative to the benchmark, and that can come in the form of price, or in the form of yield. We’re trying to find the cheapest cash flows in the high-grade bond markets. That cuts across not just the credit market, but would include [vehicles] like asset-backed securities, mortgage-backed securities, commercial mortgage-backed securities, Treasuries, and agencies. In a broader sense, we manage within the higher-grade part of the marketplace and have a very strong tradition of bottom-up company-specific research.