Lord Abbett says its Total Return fund has the best of both worlds.
With close to $2.16 billion of assets, the fixed-income fund can be managed in a nimble style — increasing and decreasing positions without moving the market to its detriment.
"Having $2 billion in bond assets versus, say, $100 billion, makes a big difference," said Robert Lee, the fund's co-manager.
At the same time, Lord Abbett has the analysis and research resources, including robust quantitative tools, that smaller mutual fund shops often do not, Lee said.
The team behind the Jersey City, N.J., firm's Total Return fund has translated its advantages into an impressive record. The fund, which focuses on risk management and generating excess returns, is one of just 18 to have beaten its fund-category performance average from 1999 through 2009, and to be out front again in 2010, according to Morningstar Inc.
This year through mid-October, the fund had outperformed its category — intermediate-term open-ended bond funds — by a small margin, 9.55% to 9.18%, according to Morningstar.
Morningstar fund analyst Greg Carlson said analysis is a definite strength of the fund. "They have a lot of research and a pretty sizable credit analyst team," he said. "They believe they can pick the right bonds in credit-sensitive areas."
Picking the right corporate bonds and high-yield bonds is a big part of why the fund has done well, he added.
The Total Return fund can invest in nearly every major taxable bond class, from U.S. Treasuries to asset-backed securities to supranational bonds issued by the World Bank and others.
Annual turnover within the fund can be in the 150% range. "We're definitely not afraid of turnover, especially in the last few years when volatility has been much greater than in the past," Lee said.
The fund's team actively seeks out what Lee calls "misevaluations." For example, commercial mortgage-backed securities were a big driver of the fund's 2009 success, when it beat its peers by 16.07% to 13.97%, he said.
"Subprime residential mortgage-backed securities were the poster child of bad underwritings," Lee said. "The huge percentage of defaulting loans caused investors to question anything that was even remotely related."
CMBS had had some deterioration in underwriting in 2006 and 2007, but their underwriting remained relatively disciplined. The market realized throughout 2009 that certain AAA-rated CMBS, especially from older vintages with better underwriting, got unfairly tainted, Lee said.
"We added significant amounts of that security at deeply discounted prices," he said. "You need to know when to take advantage and take the risk."
The fund was just as sure-handed in 2008, when it fell by 0.97%, compared with 4.70% for its category.
"They will take significant credit risk at times, but they've got a good sense of when to do that," Carlson said. "They didn't get burned in '08 for example, like a lot of bond funds that went down the credit-quality scale."
Today, Lee and his team are working off of expectations of continued, but slow, economic growth. Savings rates need to rise and consumers need to rebuild their balance sheets before things can significantly improve, he said.
Weakness in other parts of the world, including the peripheral European countries, is concerning as well, Lee said.
The Total Return fund is playing the slow-growth outlook assertively. The fund is underweight Treasuries and is extending out the risk spectrum toward investments such as corporate bonds and highly rated CMBS.
Emerging markets are another area where the fund is overweighted; growth rates and balance sheets in places like Brazil look better than those in countries like the U.S. or Japan.
Lee and his team are keen on Build America Bonds, taxable, government-subsidized muni bonds, however. There are headwinds for many muni issuers, but the fund's management is cherry-picking attractively valued and highly rated bonds backed by essential services such as water or toll roads, Lee said.
The fund is an active sector rotator. One of the fund's biggest industry overweights currently is the metals and mining sector. Its holdings include Teck Resources Ltd., for example.
Playing the industry is a way to play up-and-coming economies like China at the same time, Lee said.
"If you have exposure to metals and mining," he said, "you have exposure to the faster-growing parts of the world."