Each year, the experts at Morningstar assess more than 1,100 funds and select “Fund Managers of the Year” within a variety of categories. Here, Jon Hale discusses the Fixed-Income Fund Manager of the Year winner.
This year's fixed-income award winner is a comeback story: Ken Leech, Carl Eichstaedt, and Mark Lindbloom, managers of Western Asset Core Bond (WACSX) and Western Asset Core Plus Bond (WAPSX).
The team underperformed during the financial crisis, revealing some flaws in its credit research, ineffective risk oversight, and poor communication between the firm's macro and fundamental research teams.
Since then, a number of improvements have been made to the investment process and risk management, and resources have been strengthened across the board. From 2009 through 2014, the team has guided both funds to top-notch records.
Top-down positioning decisions are made by a larger committee; Western Asset Management's committee consists of Ken Leech and members of Western's risk-management group.
This group determines portfolio duration, yield-curve exposure, and sector weightings. Sector teams are then responsible for individual bond selection.
The firm boasts 40 analysts across investment-grade, high-yield, emerging-markets and structured products, averaging 18 years of investment experience. Leech and team favor credit-sensitive sectors and generally eschew US Treasuries.
Both funds are on the more credit-sensitive side of the intermediate-bond category, with Western Asset Core Plus Bond, true to its name, generally having larger weightings of high-yield bonds, emerging-markets bonds, and foreign-currency exposure.
While the funds' willingness to hold positions in those types of credits—as well as non-agency mortgages—can court plenty of risk, the team deserves credit for carefully negotiating a variety of markets since 2008 and notably sidestepping trouble in 2011's rocky bond markets.
At the core of the team's 2014 success was a contrarian duration call at the beginning of the year. As long-term rates declined through the year, the funds' 7% returns for 2014 bested more than 95% of peers and topped the index by more than 100 basis points.
The funds also got good mileage out of stakes in agency and non-agency mortgages and a short position in the euro.
Western Asset Core Bond and Western Asset Core Plus Bond land in the top quartile of the intermediate-term bond category for the trailing five- and 10-year periods ended December 31.
This is a great example of managers who learned something from a crisis, addressed the problems, and moved forward successfully.
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