The Fidelity Investment Grade Bond Fund (FBNDX) is an actively managed, diversified portfolio of high-quality U.S. government, corporate, mortgage-backed, and asset-backed bonds. With $7.7 billion in assets under management as of February 2023, it is one of the largest intermediate-term bond funds available to investors.
This in-depth review provides an overview of the fidelity investment grade bond fund approach, performance history, fees, portfolio composition, and more to help investors evaluate if it may be an appropriate option for their fixed income allocation.
Overview of FBNDX
Investment Objectives and Strategy
The fund seeks a high level of current income by investing primarily in investment-grade debt securities, including U.S. government, corporate, mortgage-backed, and asset-backed bonds. The managers utilize active security selection and sector rotation to add value relative to the benchmark Bloomberg U.S. Aggregate Bond Index.
Duration is managed to be similar to the index, which has an intermediate-term focus. The portfolio holds 400-600 securities on average to ensure ample diversification across issuers and sectors. Individual corporate bonds are limited to no more than 3% of assets. A rigorous research process identifies securities with stable credit profiles and attractive relative valuations.
- Expense Ratio: 0.45%
- Benchmark: Bloomberg U.S. Aggregate Bond Index
- Average Credit Quality: A
- Number of Bond Holdings: 430
- Effective Duration: 5.7 years
- SEC 30-Day Yield: 4.8%
- Inception Date: August 1971
- Minimum Investment: $2,500
Historical Risk vs. Return Performance
Over the past 10 years, FBNDX has delivered an average annual return of 1.3%, underperforming its benchmark by 0.5% annually but with similar volatility. It has ranked in the middle quintiles for the intermediate core bond category for the 3, 5, and 10 year periods, suggesting mediocre but not poor risk-adjusted results. The fund’s return profile is consistent with its emphasis on high credit quality over yield.
Detailed Analysis of FBNDX
The fund holds a broad mix of government, corporate, and securitized bonds:
- Treasuries: 37%
- Corporates: 30%
- Mortgage-Backed Securities: 16%
- Asset-Backed Securities: 7%
- Commercial Mortgage-Backed: 8%
- Cash & Other: 10%
This allocation provides wide exposure to the U.S. bond market. The corporate bond stake is tilted toward financial companies, which made up around half of the total as of December 2022. Holdings span a diverse set of sectors, but there are a few below-investment-grade issues.
Credit Quality Breakdown
Over half of the portfolio is invested in U.S. government bonds, agencies, and AAA/AA corporates. Around one-third is allocated to A and BBB credits, providing some credit risk exposure. Only 2% is invested in below-investment-grade bonds, making this a conservative portfolio overall.
- U.S. Government & Agencies: 54%
- AAA/AA Corporates: 13%
- A/BBB Corporates: 33%
- Below Investment Grade: 2%
Fees and Expenses
With a 0.45% expense ratio, FBNDX’s fees are reasonable for an actively managed intermediate bond fund. No front or back-end sales loads are charged. The fund does not have a 12b-1 fee either. Overall costs are comparable to passively managed index funds and below the 0.6% average for the peer group. The large asset base helps keep expenses down.
Historical Returns and Risk Metrics
FBNDX has produced positive annual returns in most years, reflecting the stability of high-quality bonds. But some periods of volatility occurred during recessionary environments and rising rate cycles. The fund declined 4-6% in 2022, 1999, 1994, and 1987, for example. The worst calendar year loss was -5.5% in 2013, when the Taper Tantrum roiled bonds.
Risk metrics have been in line with the benchmark and category averages over time. The standard deviation of returns has ranged from 4.5-5.5% over the decade, suggesting moderate volatility. Beta has held steady around 1.0, so the fund has not meaningfully amplified or reduced the overall market’s swings.
FBNDX has been co-managed since 2016 by veteran Fidelity portfolio managers Jeffrey Moore and Michael Plage. Moore has over 25 years of investment experience. Plage joined Fidelity in 2003. They also manage several other Fidelity bond funds and oversee a deep team of analysts. Manager continuity and tenure provide stability in the fund’s process.
Pros and Cons of FBNDX
- An active approach provides opportunity for alpha over the index
- Wide diversification across hundreds of bonds
- The focus on high credit quality makes the fund relatively low risk
- Reasonable expenses compared to similar funds
- Strong management team with decades of experience
- Modest long-term returns with limited yield upside
- Subject to interest rate risk like all bond funds
- Some volatility during periods of rising rates or recession
- Mediocre risk-adjusted performance over the last decade
- Potential for periods of underperformance versus the index
Overall, FBNDX offers a solid core bond fund option for conservative investors but may lag during bull markets for riskier credit sectors. The fund is best suited for objectives like stability, income, and diversification rather than maximizing total returns over the long run.
Alternatives to Consider
Investors looking for lower cost bond index funds could consider the Fidelity U.S. Bond Index Fund (FXNAX) with a 0.025% expense ratio.
For an active option with more yield potential, the Fidelity Strategic Income Fund (FSICX) invests across the global bond universe and may include high yield, emerging market debt, and other credit-oriented sectors.
The Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX) focuses on municipal bonds, which offer tax-advantaged income.
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The Fidelity Investment Grade Bond Fund provides broad diversification across high-quality U.S. government, corporate, and securitized bonds. Its conservative approach focuses on income and stability over maximizing returns. While the fund may fail to keep pace during bull runs for riskier sectors, it offers a steady core holding for fixed income investors concerned with managing downside risk and volatility. The reasonable fees, seasoned management team, and strong Fidelity brand add to the fund’s appeal as part of a diversified portfolio. Investors should weigh the fund’s merits and limitations against their specific objectives and risk tolerance.
What is the investment minimum for FBNDX?
The minimum initial purchase is $2,500 for investor shares. Minimums for other classes are $100k for institutional and $50 million for R6 shares.
What is the yield on the Fidelity Investment Grade Bond Fund?
As of January 2023, the 30-day SEC yield was 4.8%. This reflects the annualized income based on the bonds currently held in the portfolio.
How much does FBNDX pay in distributions?
The fund pays monthly dividends to investors based on the income generated from its bond holdings. Distributions over the past year totaled about $0.40 per share.
What are FBNDX’s largest sector exposures?
As of December 2022, the largest allocations were to U.S. Treasury bonds (37%), financial company bonds (16%), and mortgage-backed securities (16%).
What is the average duration of the fund?
The effective duration of the portfolio was 5.7 years as of December 2022. This suggests the fund has a moderate interest rate risk profile.
In another related article, Are Municipal Bonds a Good Investment in 2024? Pros, Cons and Strategies
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