The best performing US blue-chip bond funds of 2024 are sticking to their winning playbook: investing in debt from riskier blue-chip companies, as well as firms that can handle economic turbulence — and avoiding corporations sensitive to interest-rate risk.
With President Donald Trump’s tariff threats turning into reality and the Federal Reserve likely to hold off on cutting rates, credit investors are continuing to bet on shorter-duration bonds. That paid off last year, when bonds maturing in less than a year outperformed their longer-duration counterparts, which are more sensitive to moves in yields, by more than 7 percentage points.
Principal Asset Management and Pacific Investment Management Co., who run the top performing investment-grade funds, also see attractive opportunities in riskier debt from higher-rated companies, particularly those in sectors set to benefit from the boom in artificial intelligence.
Bloomberg analyzed 2024 total returns of US mutual funds labeled “investment-grade” and “high yield” managing over $5 billion and $1 billion respectively. Those that emerged on top in the high-grade list favored shorter-dated bonds.
The Principal Spectrum Preferred and Capital Securities Income Fund handed investors a total return of 9.81% last year, making it the top performer in the high-grade category. Trades that concentrated on US bank preferred stock, non-US banking additional tier 1 securities and junior subordinated debt from insurance companies paid off the most, according to Phil Jacoby, chief investment officer at Spectrum Asset Management, a boutique manager of Principal Asset Management.
“The fund will maintain its core positioning in junior subordination in 2025 in order to pick up the yield and income advantage over more senior corporate paper,” Jacoby said.
Pimco, meanwhile, is finding the best opportunities outside of corporate bonds. Higher-quality fixed income assets like US government bonds and agency mortgage backed securities have seen spreads widen as the Fed pulls back from the space.
That has created an attractive opportunity for the PIMCO Low Duration Income Fund at a time when corporate bond spreads are close to levels not seen in decades, according to Alfred Murata, portfolio manager of the fund.
“We’re benefiting from the fact that we can invest in very high quality assets, but also assets that have much wider spread than typical,” he said.
Murata and his team have a neutral view on corporate credit and like debt from the biggest US banks. In the junk-bond market, they find sectors that are less sensitive economically the most attractive, including health care and telecom.
Pimco expects borrowers in sectors involved with providing the building blocks for artificial intelligence — including energy and technology — to benefit, though the money manager is cautious of potentially “significant disruptions” as a result of AI that could be negative.
“What we’re trying to find are investments that have fixed-income-like downside protection and equity-like upside potential,” said Murata.
Here’s what else top-performing credit bond fund managers are saying:
Andrew Hofer, head of taxable fixed income at Brown Brothers Harriman:
“What worked in 2024 has worked for us for the last fifteen years. BBH follows a quantitative valuation framework that identifies underpriced bonds with potential for further spread-narrowing, then applies credit research to assess those bonds’ credit durability in adverse conditions. Our overall positioning is determined by where we find this durable value. In 2024, we found abundant investment-grade opportunities in banking, insurance, BDC debt, power generation, floating single-borrower CMBS, CLOs, auto floorplan ABS and personal consumer loan ABS.”
Marc Bushallow, managing director of fixed income group at Manning & Napier Advisors:
“Basic industry was the strongest contributor to our relative performance. Health care was another sector that was a strong contributor. For 2025, the game plan is much the same, with a focus on identifying attractive individual opportunities, including businesses that we view as attractively positioned and improving, but still have bonds that trade cheap relative to their risk. It is very important to stay disciplined and not reach for yield in the lower rated part of the market or in companies that have underlying fundamental issues.”
Mark Notkin, co-manager of the Fidelity Capital & Income Fund:
“The fund has the unique flexibility to invest throughout the whole capital structure, most notably the ability to buy stocks. The key to the fund’s success has been knowing when stocks look attractive to credit and knowing when to max out on a stock allocation. We have been and continue to be significantly underweight the riskiest parts of the high-yield market. We see strong secular tailwinds through digitization and emergence of AI.”
Noah Funderburk, director of securitized credit and portfolio manager for the Pioneer Multi-Asset Ultrashort Income Fund:
“We view a lot of the anxiety facing the bond market to be more acute on the long end of the yield curve than the front end of the yield curve, which is far more predicated on expectations for monetary policy. To a large extent, higher-for-longer is good for the front end of the curve because we’re finally at a level on rates where you can make a pretty attractive return just off of income. We feel it’s prudent to take less risk when we’re paid less for it.”
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