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 - Get Report), 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.
Portfolio manager Jim Keegan says that early last year some of his competitors mistakenly emphasized shakier assets. The managers figured that the economy would grow nicely. In that environment, low-quality bonds would climb as investors worried less about defaults. Keegan took a more pessimistic view, figuring that growth would remain sluggish. For protection, he emphasized high-quality bonds, which tend to hold their value when investors become skittish. These days Keegan remains wary of taking much risk. "We are still in the early stages of a multi-year deleveraging process," he says. "We can expect periods of low returns and high volatility." Scout Core Plus Bond succeeded by following a contrarian strategy. Portfolio manager Mark Egan likes to buy when markets are gripped by despair and sell when prices have climbed. Most often the Scout fund's moves have been on target. During the past 10 years, the fund has returned 7.6% annually, outdoing 98% of competitors. Throughout 2011, Egan traded in and out of high-quality bonds. Early in the year Scout scored good gains with high-quality bonds. But by late summer Egan began to believe that too many investors were dumping low-quality bonds and pushing their prices to bargain levels. He began buying unloved issues, including bank bonds and high-yield securities, which are rated below-investment grade. His holdings rallied late in the year as investors became more optimistic about riskier assets. By the end of 2011, Egan had 48% of his assets in corporate issues, up from 20% at the beginning of the year. Now that corporate bonds have gotten richer, he is trimming back his shakier bonds. "As the markets have become euphoric, we have sold high-yield bonds and lowered the risk of the portfolio," he says. Egan's moves don't always produce dividends right away. With the financial crisis ranging in 2008, he bought high-yield bonds and unloved mortgage securities. Those continued sinking, and the fund finished the year well behind the benchmark. But the strategy produced big rewards in 2009 when the shaky bonds soared, and Scout topped the benchmark by 28 percentage points.