Fidelity Advisor Strategic Income Invests in a Tepid Economy

The bond market has been perplexing of late. When Treasuries do well, higher-risk bonds, such as corporate debt, typically lag. Not this year. Both bond sectors have rallied recently. Cuts in U.S. short-term interest rates propelled Treasuries (interest rates and bond prices move inversely), while a low simmer in the U.S. economy drove corporate bonds higher.

The Bloomberg Barclays U.S. Aggregate Bond index, which is loaded with Treasuries and high-quality corporate debt, gained a whopping 11.5% over the past 12 months through October 31. Unfortunately, that makes it tough for many bond funds to look good by comparison. Fidelity Advisor Strategic Income (symbol FSTAX), delivered an 8.4% return, which in any other year would be considered a banner performance.

The multisector fund, a member of the Kiplinger 25, balances government securities with junkier, higher-yielding debt to deliver a fatter income stream than the Agg index. The fund currently yields 3.21%, compared with a 2.29% yield for the Agg. "It's rare for a fund with a yield in the mid threes to generate 8% to 9% returns," says Ford O'Neil, who, with Adam Kramer, makes the broad calls on which sectors of the bond market to emphasize or underplay. Specialists within each sector do the bond picking.

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These days, the man­agers have positioned the fund to do well in a moderately growing U.S. economy. O'Neil and Kramer start with a target of 40% of assets in high-yield bonds; 25% in U.S. government securities; 15% each in foreign-developed and emerging-markets debt; and 5% in floating-rate loans. Then they tweak the proportions depending on their big-picture view. Currently, the fund is tilted toward high-yield debt (42% of assets) and floating-rate loans (nearly 9%). "If we can grow at 1.5% to 2%, that's good news for the bonds that we favor today," says O'Neil.

The fund, which recently celebrated its 25-year anniversary, has evolved a bit over time. O'Neil added a sliver of stocks to the high-yield portion of the fund seven years ago to reduce overall volatility. Shares in Air Canada, the fund's largest stock holding, have climbed 47% over the past six months.