Invincible American Funds takes a hit

After successfully dodging the bond-market storm earlier this year, The Wall Street Journal reports, several big mutual funds thought the worst was over. It was a bad call, according to the paper, and now they’re feeling the pain.

The result: Some funds with great long-term track records – including American Funds and Legg Mason – have taken significant hits in just the past month or so. Some that have long been top performers are now posting below-average returns and lagging behind the broad bond market by anywhere from one to nearly five percentage points, a huge gap for bond funds.

Some of these funds used a “bull-market strategy” of buying on a dip, Jeffrey Gundlach, TCW Total Return Bond Fund manager and Morningstar’s fixed income manager of the year, told the Journal. That strategy “doesn’t work in a bear market,” he said. Gundlach’s bond fund has largely avoided the recent problems of his competitors.