Stock investors need a core fund holding like the S&P 500 that delivers reliable returns and acts as the backbone of the best mutual funds in their portfolio. So do bond investors.
Fidelity Total Bond Fund (FTBFX) invests the bulk of its assets in a broad mix of investment grade bonds. It is a top-performing fund that provides full bond market exposure and diversification in a single portfolio.
Indeed, portfolio manager Celso Munoz says the $38.9 billion fund delivers the three things that bond investors are hoping to get from their fixed-income holdings. The winning hat trick is "income generation, capital preservation and diversification," Munoz said.
"The fund is designed to provide broad exposure to the fixed-income market," said Munoz. "It gives you exposure to all of the major asset classes in the bond market like U.S. Treasurys, corporate bonds and mortgage-backed securities."
Best Mutual Fund Gains An Edge
But what gives Fidelity Total Bond Fund its performance edge? Its actively managed approach is one potential leg up. So is its ability to invest up to 20% of fund assets in higher-yielding bonds. Examples include high-yield bonds, leveraged loans and emerging markets debt.
"Having that flexibility can add a tremendous amount of value," said Munoz. "It helps us deliver a better risk-reward profile."
The fund is an IBD Best Mutual Funds 2024 winner. It has long been delivering index-beating returns to its investors. The broadly diversified bond fund has topped its benchmark in the past one-, three, -five and 10-year periods, says Morningstar, citing data through year-end 2023. In 2024, the fund has posted a 3.19% gain through Nov. 5. It is up 9.61% in the past year.
Keeping Risk Down At Best Mutual Fund
Over time, the fund has delivered returns in line with so-called Core Plus bond funds. These funds have a riskier profile due to investments in non-investment grade bonds, says Munoz.
Fidelity Total Bond Fund's top holdings include U.S. government bonds and corporates. It sports an attractive yield of 4.84% according to Fidelity data through Oct. 31.
Bond diversification gives investors an opportunity to take advantage of and gain exposure to bonds with different risk factors, yields, durations and investment opportunities. For example, Fidelity Total Bond Fund (which also has a companion ETF, Fidelity Total Bond ETF) exposes investors to shorter-term bonds currently with plump yields. But it also owns intermediate bonds. These bonds can benefit from capital appreciation if prices rise and yields decline.
"Bonds can move differently in different markets," said Munoz.
It's akin to stock investors who own different kinds of stocks, such as value and growth. One style zigs while the other zags.
Best Mutual Fund Finds Gems
Fidelity's research team includes bond and credit analysts. But it also gets input from equity analysts as well. The teams finds bonds that deliver a little bit of added income. It also looks for bonds where there is the potential for capital appreciation, says Munoz.
Munoz says the team-approach to analyzing the bond market and credit is a key to the fund's ability to deliver benchmark-beating returns.
"Our analysts are working collaboratively across the entire capital structure to identify where there's value and they can also help us identify what the pitfalls and risks are and help us avoid those," said Munoz.
Not Just Buying The Index
Munoz says the analyst team is instrumental in finding investment opportunities. And that includes bonds that are not part of the major fixed-income indexes. A stock fund manager can juice returns by finding a gem of a stock that is not part of the S&P 500. Similarly, Fidelity's army of analysts can provide Munoz with investment ideas outside of benchmark indexes such as the Bloomberg U.S. Aggregate Bond Index.
"From a research perspective, to dig into those other sectors and all those other bonds that are not in the index, there's a lot of value that can be uncovered," said Munoz.
The recent spike in longer-term Treasury yields and other market-driven bonds is a plus for bond investors, says Munoz. The 10-year Treasury yield was nearing 4.5% after Election Day following Donald Trump's win over Kamala Harris.
"Right now, the bond market is really attractive," said Munoz.
Spiking Yields Mint Opportunity
A big reason is yields are nearing highs not seen in about 20 years. It is the high starting point of yields that bodes well for bond investors. Especially bond investors in search of yield, downside protection and the potential for capital appreciation down the road, says Munoz.
"The starting point of (these higher yields) is really important and meaningful," said Munoz. "What it does is increase the likelihood of seeing positive returns in the bond market."
The higher yields also put the bond market in a position to deliver what bonds do best. And that is to generate income and provide diversification benefits in the event stocks turn more volatile, says Munoz.
Bond investors are getting a good risk-reward proposition now, says Munoz. Bonds are yielding around 5% and the average duration of a core fund is a tad over six years. That means a 1% rise in rates will result in a negative return of 1%. However, if rates fall by a full percentage point, investors will earn a total return of 11%.
"To me, that seems like a really attractive risk-reward profile," said Munoz.
Best Mutual Fund Taking Care Of Risk
When it comes to positioning, Munoz says Fidelity Total Bond Fund is erring on the side of caution. The spread between higher-yielding bonds such as corporates very narrow now. And Treasury yields are quite plump. So, Munoz has the fund positioned for less, not more risk.
He likes Treasurys a lot now.
"Treasury yields are very high," said Munoz. "We own a lot of Treasurys. I think Treasurys are one of the most attractive assets classes in the fixed-income market now."
In contrast, due to the tight spreads, Munoz says he's been more selective when it comes to riskier bonds. He's cautious even if they offer slightly higher yields.
"The amount of risk in the portfolio right now is toward the low end of where it's been historically," said Munoz. "We've got a lot of dry powder."
Best Mutual Fund Puts Money To Work
Munoz says the fund will put money to work when market volatility spikes. He thinks that would provide better price entry points and higher yields.
When it comes to bond market risks, inflation remains a risk. But inflation is less of a threat than it has been in recent years, says Munoz.
Still, bond market participants are closely watching the impact of incoming President-elect Donald Trump's policies on inflation. Trump campaigned on extending his 2017 tax cuts and adding additional tax cuts. Trump also says he wants to slap tariffs on all U.S. imports to raise revenue for the U.S. He also plans to incentivize U.S. manufacturers to bring more manufacturing capabilities back to the U.S.
Both policies are inflationary, Wall Street economists say.
"The concern that many in the bond market have is that tariffs can reignite inflation," said Munoz.
