Why Some Shares of This Bond Fund Are Now Rated Gold

A better appreciation of how American Funds Bond Fund of America’s ABNDX independent portfolio parts come together to form an appealing whole earned it a Process Pillar upgrade to High from Above Average in November 2023, which boosted most of the strategy’s share classes to a Morningstar Medalist Rating of Gold.

Increased conviction in the fund’s approach drove the upgrade. The fund has struck the right balance of flexibility and coordination among its four named independent managers and an analyst-run portion of the fund. The managers draw on their respective areas of expertise in their separate portfolio sleeves. They can overweight sectors within the Bloomberg U.S. Aggregate Bond Index or pursue out-of-benchmark opportunities. However, unlike past years, when specialist managers were more prone to a niche focus, now all four managers and the analyst-led research portfolio gauge their results against the Aggregate Index. Semiannual firmwide macroeconomic guidance also ensures that the managers do not work at cross purposes.

While the fund’s 2023 performance has been subpar, its longer-term record remains remarkable. The R6 share class’ 1.3% gain through the first 11 months of the year lagged the index by 0.3 percentage points, but over longer stretches, its record remains excellent. Since 2017, when all four managers were in place, the strategy beat both the index and the intermediate core bond Morningstar Category median peer in almost every rolling three-year period through November 2023. At the right price, this fund is one of the category’s most reliable options.

Here are some other Medalist Rating highlights from last month.

Metropolitan West Total Return Bond MWTIX

Several upcoming retirements dropped Metropolitan West Total Return’s People rating to Above Average from High. The Medalist Rating of all five share classes fell to Silver from Gold. In 2021, former CIO and longtime manager Tad Rivelle retired. Now, TCW announced Laird Landmann will step down at the end of 2023 and that Steve Kane will follow at the end of 2024. Replacing the expertise and experience of these three managers will be difficult. Rivelle, Landmann, and Kane started at Pimco in the early 1990s and founded Metropolitan West Asset Management in 1996, which TCW acquired in late 2009. They leave behind an impressive group of fixed-income investors, including manager Bryan Whalen, but the loss of these three stalwarts is significant.

Fidelity Low-Priced Stock FLPSX

Despite the looming retirement of legendary manager Joel Tillinghast, Fidelity Low-Priced Stock remains a great option. After more than three decades at the helm of this fund, Tillinghast is set to retire at the end of 2023. But he is passing the torch to two capable successors, Morgen Peck and Sam Chamovitz, who are already in firm control of the portfolio’s decision-making. Both managers are Fidelity veterans and have demonstrated success managing other strategies. They also plan to follow Tillinghast’s successful guiding principles. The strategy’s more than $30 billion asset base poses a challenge, but the managers cope with it by spreading out across a sprawling portfolio of more than 700 stocks. Greater confidence in Chamovitz and Peck’s ability to apply this approach led to the Process Pillar upgrade to Above Average from Average. That lifted the fund’s three share classes to Medalist Ratings of Silver from Bronze.

FMI Large Cap FMIHX and FMI Common Stock FMIMX

Slipping confidence in FMI Large Cap and FMI Common Stock’s approach led to Process Pillar rating downgrades to Above Average from High for both strategies. FMI’s 10-person portfolio committee invests with a long-term owner’s mindset and a rigid focus on business fundamentals and valuation. Few companies meet their stringent criteria, leading to focused portfolios with only 30 to 40 names. Both concentrated portfolios will differ greatly from their respective benchmarks in sector composition, market cap, and style. Being distinct isn’t necessarily a negative, but the strategies’ portfolio tilts haven’t proved effective and can lead to prolonged periods of underperformance, such as the long stretch from 2010 through 2020 where both strategies largely underperformed. The funds still have several appealing traits, despite their overall Medalist Rating dropping to Silver from Gold.