Bond Funds That Beat the Benchmarks in 2011

NEW YORK (TheStreet) -- Plenty of bond funds lagged the benchmarks last year. The problem was that portfolio managers emphasized shorter bonds and stayed away from Treasuries. Those were exactly the wrong moves in a year when long Treasuries soared.

Even bond star Bill Gross missed the mark. Gross figured that the red ink in Washington would push up interest rates, a move that would punish long bonds. As a result of the bad call, his PIMCO Total Return Fund (PTTAX) gained only 3.8% for the year and trailed the Barclays Capital Aggregate Bond Index by more than 2 percentage points, according to Morningstar. Other big intermediate-term funds that lagged the benchmark by wide margins include Dodge & Cox Income (DODIX) and Metropolitan West Total Return (MWTRX).

The average intermediate-term bond fund trailed the benchmark by a percentage point. But some managers surged ahead of the pack. The winning managers held long Treasuries or used other strategies that succeeded in volatile markets. Intermediate funds that topped the Barclays index include Delaware Core Bond (DPFIX), RidgeWorth Total Return Bond (CBPSX), and Scout Core Plus Bond (SCPYX).

Delaware Core Bond outpaced the benchmark by emphasizing long Treasuries. The move enabled the fund to return 8.0% during 2011, surpassing 93% of competitors.

Delaware portfolio manager Roger Early became interested in Treasuries early in the summer. At the time, many portfolio managers began to worry that the U.S. credit rating would be cut. If the downgrade occurred, the managers figured that Treasury prices would fall, and the yields would rise. To avoid trouble, many funds shunned long Treasuries.

But Early took a different view. He figured that a downgrade would unnerve the markets. That could result in higher Treasury prices as investors rushed to buy safe assets. "We got on board Treasuries in early summer, and we stayed on throughout the third quarter," he says.

Early also held some corporate bonds that performed well in 2011. Worried that debt problems in the U.S. and Europe could hurt weaker banks, he stuck with blue-chip issuers, including U.S. Bancorp (USB) and Wells Fargo (WFC). Those bonds outperformed the bank holdings in the Barclays benchmark.

RidgeWorth Total Return Bond gained an edge last year by keeping a big stake in AA-rated corporate bonds. The solid issues thrived when interest rates sank and investors bid up prices of high-quality bonds. The strategy enabled the fund to return 9.5% for 2011, outpacing 98% of peers.

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