Morningstar Advisor - February/March 2013 - (Page 39)

The phenomenon is not limited to a group of small outlier funds, either. A survey of the largest funds in the category with at least three years of history shows that several actively managed funds that previously bore relatively high R-squared figures before the crisis have since dropped markedly (Exhibit 2). A perusal of their portfolios helps illustrate why so many of these funds are acting differently from the index. The most well-known example is PIMCO Total Return PTTRX, which, while famously short of its benchmark and bereft of U.S. Treasury bonds at some points during 2011, has also distinguished itself by branching out more aggressively to sectors such as high yield and non-U.S. developed- and emerging-markets bonds, and even some municipal debt. Other high-profile funds, such as Metropolitan West Total Return Bond MWTRX, have always been a bit more willing to deviate from the benchmark but have been even more intrepid since the crisis. That portfolio, for example, has a large exposure to nonagency mortgages and also holds an overweighting in commercial mortgage-backed securities. Exhibit 1 Falling R-Squareds R-Squared of the Average Intermediate-Term Bond Fund Relative to the Barclays Capital U.S. Aggregate Index % 36 month rolling R-squared 100 90 80 70 60 11/06 05/07 11/07 05/08 11/08 05/09 11/09 05/10 11/10 05/11 11/11 05/12 11/12 Exhibit 2 Falling Away From the Barclays Aggregate Index Name Total Net Assets ($bil) R-Squared 3-Yr Ending Dec. 2006 (%) R-Squared 3-Yr Ending Nov. 2012 (%) PIMCO Total Return Instl 284.98 97 36 Vanguard Total Bond Market Index Inv 116.42 100 99 American Funds Bond Fund of Amer A 34.10 89 82 It’s not just the traditionally adventurous who have taken formerly less-traveled pathways. Vanguard Intermediate-Term Investment-Grade Fund VFIDX has historically fashioned itself a mostly corporate-bond portfolio but still had a high correlation to the benchmark before the financial crisis. It, too, holds 7% of its assets in asset-backed securities and 3.7% in commercial mortgages, for example, and its R-squared in relation to the Barclays Aggregate has dropped to 64 from 98 before the financial crisis. JPMorgan Core Bond Select 29.60 98 96 Dodge & Cox Income 26.35 91 25 Metropolitan West Total Return Bond M 23.63 74 48 T. Rowe Price New Income 20.45 99 83 Vanguard Interm-Term Invmt-Grade Inv 19.78 98 64 Spartan U.S. Bond Index Investor 16.18 100 99 Fidelity Total Bond 13.97 97 69 Loomis Sayles Investment Grade Bond A 12.30 55 6 Western Asset Core Plus Bond I 10.20 90 38 PIMCO Investment Grade Corp Bd Instl 9.57 97 26 Delaware Diversified Income A 9.56 61 22 Straying Index TCW Total Return Bond I 8.40 95 44 Managers have described a variety of reasons for deviating from the benchmark, and a central theme has to do with the rock-bottom yields being paid by Treasury bonds. There is clearly some concern among managers about an eventual spike in rates, but the general consensus seems to revolve as much Russell Strategic Bond I 8.07 98 54 Harbor Bond Instl 7.95 96 35 Federated Total Return Bond Instl 7.56 96 71 American Century Diversified Bond Instl 6.24 99 92 Data as of Nov. 30, 2012 MorningstarAdvisor.com 39 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2013

Morningstar Advisor - February/March 2013
Contents
Contributors
Letter From the Editor
Social Media, the Old- Fashioned Way
Do You Use Active Strategies?
Youth Appeal
How to Buy the Unloved 2013
Morningstar Managers of the Year
Investments á la Carte
Investment Briefs
Approaches to Absolute-Return Investing
In Agriculture, It’s Good to Be Strong
Yes, There Are Good Active Funds
The Decoupling
Where It Could Pay to Be Active
The Active Fund That Defies Obsolescence
The Epitome of an Active Manager
Lines of Communication
The Existence of Market Timing ‘Intelligence’
A Route to Commodities that Bypasses the Futures Market
Best Positioned for Health-Care Reform
Diversified Stock Funds That Earn Their Stars
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
A Twisted Debate

Morningstar Advisor - February/March 2013