3 Great Multisector Bond Funds

Between traditional higher-quality core bond and riskier high-yield corporate-bond funds lie strategies that offer investors a diversified approach to income generation with higher risk-adjusted return potential. Multisector bond funds bridge this gap by investing in a mix of fixed-income sectors (U.S. government, securitized, investment-grade corporates, non-U.S., and high-yield debt).

These strategies vary in style and risk, typically holding between 35% and 65% of assets in non-investment-grade securities. Their ability to take advantage of relative value opportunities across various sectors, credit qualities, and the maturity spectrum created by market inefficiencies and volatility gives them an advantage. Intermediate core bond funds may have very small stakes in riskier credit, while high-yield bond funds concentrate risk in junk-rated corporate bonds.

While 2022 was challenging for bond investors, it doesn’t mean they should settle for staid strategies, especially with yields across most fixed-income sectors at levels not seen since 2008. While multisector strategies are typically more volatile than high-quality core bond funds, they can offer a smoother ride compared with the concentrated risk in high-yield funds, for example. However, their higher dose of credit risk versus traditional core or core-plus bond strategies may limit their diversification to equities.

The three funds below offer different approaches to multisector bond investing to enhance income potential and complement an investor’s core bond allocation.

Pimco’s group CIO Dan Ivascyn, Alfred Murata, and Josh Anderson run the multisector bond Morningstar Category’s largest offering, Pimco Income PONAX, which has a Morningstar Medalist Rating of Silver. It relies on diversification across various sectors like high-yield corporates and emerging markets but leans most into securitized debt like agency and nonagency mortgage-backed securities, commercial MBS, and asset-backed debt. It aims for consistent monthly income distributions while managing the risks of more-complex and below-investment-grade debt. As of May 2023, the fund’s 30-day SEC yield was 5.0%.

Bronze-rated JPMorgan Income JGIAX relies on a value-driven approach that favors securitized debt and high-yield corporate bonds to generate its 5.6% SEC yield, as of May 2023. Led by multisector bond veteran Andrew Norelli, the fund draws on a small army of portfolio managers, sector specialists, and fundamental research analysts to drive positioning for this bottom-up-driven process. This team favors the stable cash flows of mortgage-backed and asset-backed securities but includes high-yield credit and emerging-markets debt to round out the portfolio. It also strives to consistently distribute monthly income. The strategy is also available in an exchange-traded fund wrapper.

Fidelity Strategic Income’s FADMX approach relies more on corporate bonds to generate higher income. Fixed-income mainstay Ford O’Neil and Adam Kramer lead this Silver-rated strategy, which draws on the firm’s vast global resources to deliver high current income. They adjust allocations around neutral targets of U.S. government and investment-grade debt (30%), high-yield corporates (45%), and non-U.S. debt, including emerging markets (25%). The fund had a 5.4% SEC yield as of May 2023.