2 Top-Performing Core Bond Funds

With the Federal Reserve moving to cut interest rates, core bond funds (a key building block of most portfolios) are posting modest gains in 2024.

Bond funds have benefitted from cooling inflation pressures and moderating economic growth—the same trends that have allowed the Fed to shift from raising interest rates to lowering them. That’s been particularly beneficial for funds focused on bonds with longer maturities, which are more sensitive to fluctuations in interest rates.

We looked for the top-performing intermediate core bond funds over the last one-, three-, and five-year periods. Two funds made it through the screen, both of which are actively managed:

• Baird Aggregate Bond Inst BAGIX
• JPMorgan Mortgage-Backed Securities I OMBIX

Core Bonds Funds Performance

Core bond funds have on average returned 10.42% over the last 12 months, just ahead of the 10.05% return on the Core Bond Index. Over the last three years, core bond funds have lost 2.12% on an annualized basis, compared with a 2.22% annualized decline on the index. For the past five years, the funds in the category have averaged a 0.05% return per year vs. a negative 0.09% annualized decline in the same period.

What Are Core Bond Funds?

Intermediate-term core bond portfolios invest primarily in investment-grade US fixed-income issues, including government, corporate, and securitized debt, and hold less than 5% in below-investment-grade exposures. Their durations (a measure of interest rate sensitivity) typically range between 75% and 125% of the three-year average of the effective duration of the Core Bond Index.

Screening for the Top-Performing Core Bond Funds

We looked at returns data from the past one-, three-, and five-year periods. We screened for open-ended and exchange-traded funds in the top 33% of the category using their lowest-cost primary share classes for those periods. We also filtered for funds with Medalist Ratings of Bronze, Silver, or Gold. We excluded funds with assets under $100 million and analyst coverage that was not 100%. This left us with two funds, both of which are actively managed.

Because the screen was created with the lowest-cost share class for each fund, some may be listed with share classes that are not accessible to individual investors outside of retirement plans, or they may be aimed at institutional investors and require large minimum investments. The individual investor versions of those funds may carry higher fees, reducing returns to shareholders. In addition, Medalist Ratings may differ among the share classes of a fund.

Baird Aggregate Bond Inst

• Ticker: BAGIX
• Morningstar Medalist Rating: Gold
• Morningstar Rating: 4 stars

“Baird Aggregate Bond’s conservative playbook means that it rarely wows in any given year, but over time its results are outstanding.

“The team executing this playbook has had a lot of practice. Four of the 10 named managers worked together for years before this fund’s September 2000 inception. As colleagues at a prior firm, they honed a team-oriented investment philosophy centered on keeping fees low and adding value without taking undue risk. Standard-bearers Mary Ellen Stanek, Warren Pierson, Charles Groeschell, and Jay Schwister have passed on that philosophy and its practice to the next generation, including relative newcomers Andrew O’Connell and Abhishek Pulakanti. They both became named managers here in May 2022, though each has been at Baird Advisors for more than 10 years.

“The approach is simple but effective. Sticking to U.S.-dollar-denominated bonds without the complications of derivatives or leverage, it begins with matching the Bloomberg US Aggregate Bond Index’s overall interest-rate sensitivity, or duration. In line with the fund’s intermediate core bond Morningstar Category, the team takes most of its credit risk in the investment-grade space. While it can hold on to bonds that have lost their investment-grade rating, it does not buy them. The portfolio’s junk bond allocation has been 1% or less since 2015, and at year-end 2023 its 0.1% stake in debt rated below BBB ranked in the peer group’s bottom half.” “This fund remains a very reliable option.”

—Alec Lucas, director of manager research, active funds research

JPMorgan Mortgage-Backed Securities I

• Ticker: OMBIX
• Morningstar Medalist Rating: Silver
• Morningstar Rating: 5 stars

“JPMorgan Mortgage-Backed Securities’ experienced securitized managers, disciplined process, and strong decisions make it a compelling option for investors.

“Firm veterans Rick Figuly, Andy Melchiorre, and Michael Sais have used their mortgage-backed securities expertise to generate impressive results. Their bottom-up efforts give them an edge versus most rivals. Sais has run this fund since 2005, but Figuly (2015), the head of J.P. Morgan’s value-driven core bond team, and MBS specialist Andrew Melchiorre (2019) oversee the day-to-day management. It’s very much a team effort, though, with the managers’ fundamental research efforts. They also draw on additional MBS specialists and a growing eight-person securitized analyst group for ideas and ongoing monitoring.

“The strategy’s heavy MBS stakes differentiate it from intermediate core bond peers who typically manage to the Bloomberg US Aggregate Bond Index, which features a mix of Treasuries, investment-grade corporates, and agency MBS. The portfolio consists of agency residential and commercial MBS, typically accounting for 65%-80% of assets. This sets it apart from the typical peer, which has historically ranged between 25% and 30% for similar bonds.

“The strategy’s unique contours, including its absence of corporate bonds, can cause it to lag most rivals in periods of corporate bond stress, but its high-quality, mortgage-centric holdings give it a boost when credit is out of favor. This resiliency, as well as strong security selection, have paid off for investors.”

—Paul Olmsted, senior manager research analyst