Silver-rated Fidelity Investment Grade Bond’s long-tenured manager provides value through sector rotation and security selection.
The following is our latest Fund Analyst Report for Fidelity Investment Grade Bond Fund FBNDX.
Fidelity Investment Grade Bond FBNDX primarily focuses on the investment-grade sectors that make up the Bloomberg Barclays U.S. Aggregate Bond Index and provides value through sector rotation and security selection. A long-tenured lead portfolio manager, well-defined approach, and reasonable expenses support a Morningstar Analyst Rating of Silver.
Jeff Moore has helmed the fund since 2004 and was joined by Michael Plage, a five-year manager on Fidelity Corporate Bond, in late 2016. Together with a cadre of experts from across Fidelity’s fixed-income shop, many of whom lead their own highly rated funds, the two portfolio managers nimbly adjust sector allocations and yield-curve positioning when they determine pockets of value within the fund’s relatively constrained universe. Unlike its more-adventurous sibling, Fidelity Total Bond FTBFX, which can own up to 20% in non-investment-grade fare, this fund may reach only half that as its maximum allocation.
The portfolio's exposure to subprime mortgage-backed securities, held through an internal ultrashort account, left it struggling in 2007 and 2008, but since that point, the fund has made some strides in repairing its record. It topped two thirds of peers with a 16% surge in 2009, thanks to overweightings in battered corporate bonds and commercial MBS.
Recently, the fund has seesawed with volatile markets for credit. In late 2015, a bullish stance on energy and basic materials weighed on the fund’s calendar-year performance, which toppled 1.6% and lagged 90% of intermediate-bond peers as well as its benchmark. Many of those same names recovered, though, buoying 2016 performance to 5.3%, within the top decile of peers. Through the first half of 2017, Moore and Plage assumed a more-conservative risk posture, significantly reducing richly priced corporates and mortgages in favor of U.S. Treasuries. The resulting sector profile more closely resembles the benchmark, particularly as the fund is run duration-neutral to its index, but with plenty of liquidity to move when opportunity avails itself.
Process Pillar: Positive | Emory Zink 09/08/2017
Managers Jeffrey Moore and Michael Plage work with the standard fixed-income tool kit. Starting with a macroeconomic outlook developed in concert with other members of the Fidelity bond team and its macro research group, they adjust the fund's sector allocations and exposures to various spots on the yield curve--though big duration plays relative to the fund's Aggregate Index benchmark are off the table. Once the fund's broad positioning is determined, Moore and Plage draw on the expertise of sector specialists--including Fidelity's well-respected government team and deep pool of credit analysts--to identify attractive individual securities.
Following personnel changes and efforts to improve communication and accountability across the team, Fidelity has dealt with the issues that led to problems during a rocky 2007 and 2008. Moreover, Fidelity has invested heavily in its fixed-income operations; portfolio managers have access to a variety of tools to slice and dice the broad portfolio's risks and identify opportunities in individual credits and mortgage pools. The team has put these tools to good use, identifying relative-value opportunities in temporarily beaten-down sectors of the market and in individual securities. This skill, together with careful attention to risk management, supports the fund's Positive Process rating.
While the fund serves as Fidelity’s investment-grade-focused core bond option, Jeffrey Moore and Michael Plage have the flexibility to hold up to 10% in non-investment-grade fare and may invest in out-of-benchmark sectors such as Treasury Inflation-Protected Securities and collateralized-mortgage obligations (10% and 2%, respectively, as of mid-2017). The managers regularly differentiate the portfolio from more indexlike options by selecting from this supplemental investment menu; for example, as of July 2017, the fund’s BB exposure sat at around 5%, a bit higher than its typical low-single-digit allocation, with the managers citing recent opportunities to acquire energy and banking names with a high probability of a near-term upgrade.