(Bloomberg) -- Rick Rieder had a clear mission when he was named chief investment officer for BlackRock Inc.’s actively managed bond funds in 2010: fix one of Laurence D. Fink’s biggest regrets.

Fink, chief executive officer of New York-based BlackRock, had built the firm from a bond shop into the world’s largest asset manager through acquisitions. In the process, the fixed- income unit had lost its course, with 59 percent of funds trailing peers in the 2008 financial crisis. As investors poured $1 trillion into bond mutual funds in the U.S. in the next four years, Fink watched Bill Gross’s Pacific Investment Management Co. more than double in size while his active fixed-income unit languished.

Today the business has become a favorite for Fink, who has highlighted his improved fixed-income performance more than 20 times on four conference calls this year. At a time when most bond managers, including Pimco, suffered redemptions, BlackRock last quarter attracted $7.2 billion into its active fixed-income funds. Rieder, 52, speaks daily with Fink as part of the CEO’s circle of advisers and touts the benefits of his go-anywhere Strategic Income Opportunities Portfolio to clients after beating 89 percent of rivals this year.

“In 2009, due to turnover and performance issues, we weren’t actively recommending them,” said Brian Rowe, director of manager research at Seattle-based consultant Wurts & Associates, which advises institutional investors on more than $74 billion in assets at BlackRock and elsewhere. “Now, as you see Rick put his imprimatur all over BlackRock’s funds, they’re getting more disciplined and you’re seeing outperformance.”

Attracting Money

Rieder’s $9.6 billion Strategic Income fund is attracting money as expectations that the three-decade rally in bonds may have ended drive investors into non-traditional strategies. His performance helped the firm’s fixed-income lineup beat 61 percent of peers in 2012 and 57 percent this year through September, according to Morningstar Inc.

Rieder’s unit, which suffered from $22 billion in net redemptions in the five years through Dec. 31, has also been shielded from withdrawals this year because it isn’t as focused on intermediate-term bond offerings, which have long been the core bond holdings for investors and are now suffering the bulk of fixed-income redemptions.

Intermediate-term bond funds generally have a duration of 3.5 to 6 years, according to Morningstar. The higher the duration, the more sensitive a fund is to changes in interest rates.

‘Real Volatility’

“Volatility in fixed income is real and going to be here permanently, so we’re in for a very different fixed-income market than the last 30 years,” Rieder said in an interview at the firm’s headquarters. “Interest rates bailing you out is a thing of the past.”

Hired in 2009 when BlackRock bought his hedge-fund firm, R3 Capital Partners, Rieder was promoted to CIO the next year. Strategic Income, which Rieder started managing in August 2010, returned 3.3 percent in the year ended Nov. 6, compared with a 1.2 percent drop in the Barclays U.S. Aggregate Index.

Rieder reduced sensitivity to interest rates in Strategic Income, cutting the effective duration below 2 years from as high as 3.7 years before he took over, according to Morningstar data. As of Sept. 30, the fund’s duration was 1.4 years, compared with 5.6 years for the Barclays Aggregate.

Strategic Income’s unconstrained approach means it doesn’t have to track the Barclays Aggregate, the most widely used fixed-income benchmark, so it isn’t restricted by quality, sector or region, and it can employ hedging techniques. Rieder said he’s finding opportunities in riskier credit including commercial mortgage-backed securities, asset-backed securities and high-yield bonds with maturities of generally no more than five years.

Gross’s Losses

Investors put $44.9 billion into nontraditional bond funds through Sept. 30 while pulling $61.7 billion from intermediate- term bond funds in the U.S., according to Chicago-based Morningstar.

Gross’s $248 billion Total Return Fund, the biggest intermediate-term bond fund, lost $33.2 billion to redemptions this year through Oct. 31, according to Morningstar estimates. Jeffrey Gundlach’s $34 billion DoubleLine Total Return Bond Fund, which makes up more than half of Los Angeles-based DoubleLine’s assets, lost $3.1 billion to withdrawals. BlackRock’s largest total return offering, the Total Return Fund co-managed by Rieder, has $2.9 billion in assets.

‘Greatest Failures’

Investors fled from traditional fixed income as interest rates surged in May, when Federal Reserve Chairman Ben S. Bernanke told Congress that the central bank might pull back its unprecedented stimulus.

In the first three quarters, BlackRock’s active bond funds took in $6.2 billion, led by deposits of $4.8 billion for Strategic Income. BlackRock, which oversees $4.1 trillion, has 48 percent of its bond assets in passive funds and is relying on active products to bring in deposits as investors flee fixed- income offerings pegged to market benchmarks.

While BlackRock missed out on the cash flooding into fixed income after the financial crisis, Newport Beach, California- based Pimco, the world’s largest bond manager, grew to $2 trillion in assets.

“One of the greatest failures of BlackRock has been our fixed-income mutual fund flows over the last few years, compared to our great competitors,” Fink told analysts and investors in a January 2011 conference call. “Obviously our performance in 2008 was a chief cause of that.”

Wharton MBA

As BlackRock reaped fixed-income deposits in the third quarter, Pimco’s mutual funds in the U.S. lost $25 billion to withdrawals, Morningstar estimated, and San Mateo, California- based Franklin Resources Inc. reported redemptions of $8.5 billion in the bond category.

“The dialogues we’re having with clients related to fixed income are more active than they have been in years,” Fink said in an Oct. 16 conference call discussing quarterly results. On a July call, he said Rieder’s fund was “well positioned to be one of BlackRock’s largest and most-important products.”

Fink, who co-founded BlackRock in 1988, started remaking the bond unit in 2010 when he promoted Peter Fisher to head of fundamental fixed income and Rieder became deputy CIO under Curtis Arledge. When Arledge left that year, Rieder succeeded him.

Rieder has come far from his freshman days at Hobart College in Geneva, New York, where he almost flunked out of school. Rieder, who grew up in Scarsdale, New York, transferred to Emory University in Atlanta and graduated third in his class with a bachelor’s in business administration before earning an MBA from the University of Pennsylvania’s Wharton School. He spent 21 years at Lehman Brothers Holdings Inc. before founding R3 Capital in 2008.

Smart Intern

One weekend a month, he wakes up at 3:30 a.m. and works until 6 p.m. both days, analyzing as many as 400 pages of economic charts to glean where markets are headed. He unveils his findings in a monthly call with clients.

With a self-deprecating style, Rieder calls his intern smarter than he is and jokes of an inability to do handiwork such as screwing in a light bulb.

Fisher led a reorganization of the bond division last year, giving unit heads greater autonomy and accountability, before leaving his post to join the BlackRock Investment Institute in February. Rieder focuses on investing while Kevin Holt, his co- head of Americas fixed income, handles business management. Rieder and Holt oversee about $650 billion and more than 200 investment professionals.

‘Best Ideas’

Strategic Income, which opened in February 2008, averaged 3.3 percent returns in the past three years to outperform 70 percent of rivals Morningstar classifies as nontraditional bond funds. The fund had an off-year in 2011 when it fell 0.7 percent, compared with a 7.8 percent gain in the Barclays Aggregate as investors sought the safety of Treasuries amid European turmoil.

“The theory is you can get the very best ideas of a particular fixed-income manager, in this case, Rick, and the broad range of expertise that a firm like BlackRock has,” said Eric Jacobson, a senior fund analyst at Morningstar. “The risk, of course, is that when you give that much freedom to somebody, you give them the freedom to fail.”

A challenging climate doesn’t deter Rieder, who said he rejected the safer route of returning to work as a financial analyst at SunTrust Banks Inc. after graduating from Wharton. He was offered a job as a trader at brokerage E.F. Hutton & Co., and took it.

Muni Bonds

“Before the crisis, nothing happened,” Rieder said. “Now there’s a lot to do and things to sink your teeth into. Fixed income is finally interesting.”

In today’s environment, Rieder said he likes assets that provide income and minimize interest-rate risk, such as floating-rate bonds and sovereign debt in Portugal, Ireland and Italy. He’s buying municipal bonds because he doesn’t see other major U.S. cities defaulting following Detroit’s bankruptcy in July.

The economy was strong enough for the Fed to begin tapering in March, according to Rieder, who said central bank spending isn’t improving employment.

“This country won’t grow as fast because the education system isn’t growing,” Rieder said. “The Fed thinks unemployment is cyclical, but it’s structural.”

Equities Setback

He sees charter schools, which operate independently with public funding, as part of the answer. Rieder, who cited data in a September presentation showing that 42 percent of public students in the largest U.S. cities don’t finish high school, helps lead educational programs in Atlanta and Newark, New Jersey.

BlackRock’s success in fixed income contrasts with the setback in the active-equity business. That unit’s chief investment officer, Chris Leavy, went on medical leave in June after replacing managers at strategies accounting for almost 40 percent of the division’s $118 billion. Fink remains optimistic that the firm’s stock pickers can emulate Rieder’s turnaround, after redemptions of $16.3 billion at the active-equity unit in the first three quarters.

“Much of the confidence I have in making these changes in our equity platform stems from the success we had in the rebuilding of our fixed-income side,” Fink said on last month’s conference call.

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