Top bond fund manager Ford O’Neil reveals his ‘secret sauce’ to outperform

For Fidelity’s Ford O’Neil, one of the biggest lessons of his life came on the lacrosse field. The portfolio manager, who has been with Fidelity for three decades and oversees more than $155 billion in assets, played the sport in high school and at Harvard University. One of the top skills he learned was teamwork, which played into his reshaping of the firm’s fixed-income strategy more than 25 years ago, he said. “[It] was clearly driven by my love of playing team-based sports,” said O’Neil, who also coached the youth teams of his now-adult children. “We argued … do we want the star system?” he told CNBC. “The theory was, well, you’re relying on one person. We decided a team-based approach was better, because you had challenge and review among 2,3,4 people on my team.” That investment strategy is still in place and so is O’Neil — who was recently nominated for Morningstar’s 2024 outstanding portfolio manager award for investing excellence. He previously took home the title of Morningstar fixed-income manager of the year in 2016. “Ford … has been instrumental in making Fidelity, a family that built its reputation as a home for prominent stock-pickers, into a fixed-income powerhouse, too,” Morningstar’s Dan Culloton wrote on O’Neil’s nomination in April. The 62-year old began his post-Harvard career in investment banking. After a meeting with Fidelity to pitch an initial public offering, O’Neil pulled one of the portfolio managers aside and asked how he could get a job at the firm. He was told to go to business school first. So, O’Neil went to Wharton and landed a summer internship at Fidelity. After getting his MBA, he was hired as an analyst and was promoted to portfolio manager a couple of years later. “[I] absolutely love what I do every day,” he said. “It’s a great job and I have not wanted any other job for the last 32 years.” Generating long-term outperformance The largest among the many funds O’Neil co-manages is the Fidelity Total Bond Fund (FTBFX), which has $35.8 billion in assets and a 5.32% 30-day SEC yield. Morningstar gives the fund four stars and a gold rating. From December 2004 through the end of March 2024, Fidelity Total Bond Fund’s 3.7% annualized gain topped the typical intermediate core-plus bond Morningstar Category fund’s 3.3% and the 3.1% of its benchmark, the Bloomberg U.S. Aggregate Bond Index, according to Morningstar. “What really sets O’Neil’s record apart, though, is its consistency,” Morningstar’s Culloton said. “Fidelity Total Bond not only has beaten its peers and benchmark in many of the calendar years on O’Neil’s watch, but it has done so with less volatility, as measured by standard deviation, and with shallower drawdowns.” Also in O’Neil’s quiver is Fidelity Total Bond ETF (FBND), which has a 30-day SEC yield of 5.46%, according to Morningstar, and an expense ratio of 0.36%. FBND 1Y mountain Fidelity Total Bond ETF year to date The funds are considered core-plus, which means managers can add high yield and other alternatives to core options of diversified, high-quality bonds. FTBFX currently has 87% of its assets in investment-grade bonds. O’Neil pointed out that Fidelity’s clients aren’t looking for fixed income to be a driver of performance, but instead as a source of income and preservation of capital relative to equities, as well as a diversifier. “We’re all about thinking about generating results over and above benchmark, but doing it in a risk-controlled environment,” said O’Neil, who added that the team doesn’t make big interest rate or currency bets. “It’s sort of the old — create alpha , manage risk, rinse, and repeat,” he added. “If we do it well, the thought was we can be in the top half of our competitive universe over short time periods. But if we can do it consistently over years and years and years, all of a sudden, the fund starts to generate top quartile, [or] even better results over the five-, 10-, now 20-year time period.” Not only are there multiple managers on a fund, but those managers also consult with Fidelity analysts and traders on various ideas such as sector allocation and security selection, O’Neil emphasized. The ‘secret sauce’ The fixed-income team also benefits from teaming up with equity analysts when they talk to corporate executives, public agencies and government issuers. “Part of the ‘secret sauce’ at Fidelity is having not only a very well known equity group, but a reasonably well known fixed-income group as well,” O’Neil said. “That entices what we call the C-suite to come and visit us.” While executives may have different slants to their conversations when solely with an equity team or fixed income team, with both in the room at Fidelity, they “have to play it down the middle,” he said. “That is a huge advantage that we have at Fidelity in terms of one, the access, but then two, very, very candid conversations with these individuals,” he said. Where O’Neil sees opportunity Right now, O’Neil believes a soft-landing scenario is the most likely outcome for the economy as the Federal Reserve navigates its monetary policy and eventual rate cuts. Because of that, Treasurys are the largest holding in the portfolio today, he said. He specifically likes intermediate Treasurys in the four- to seven-year category. “Those would be the ones that would benefit the most when the Fed starts to reduce rates, because as the curve disinverts and then potentially steepens, those rates will be going down faster, in our opinion, most likely, than longer rates,” he said. US5Y YTD mountain 5-year Treasury While Treasury yields are near highs, credit spreads — especially investment grade — are near all-time lows, O’Neil pointed out. “If you’re a buyer of nominal yields, you’re finding the market very attractive. If you’re a relative value buyer in credit, it’s a very, very challenging marketplace today,” he said. O’Neil and his team have also kept some exposure to high yield and leveraged loans they they see as attractive. “Although those spreads are also tighter than they were a year ago, as long as you believe the U.S. economy will continue to head towards a soft landing, those yields are still much higher than the yields in investment grade,” he said.