In a low interest rate environment that has investors clamoring for yield, it’s a challenge for bond fund managers to distinguish themselves from the herd. Most managers either cope with falling payouts or load their funds with junk bonds. That makes managers who add value by employing solid analytical skills a hot commodity.–The Editors

The global economy has improved over the past two years and interest rates have remained extremely low. It’s become increasingly difficult to fund much in the way of yield–to say nothing of value–in the bond markets. Investors seeking respectable cash flows have increasingly turned to lower-quality bonds, sparking a run in junk bond prices.

But bond fund managers with the know-how, can achieve decent yields while keeping a damper on credit risk.

David Tiberii, manager of T. Rowe Price Corporate Income (PRPIX, 800-638-5660), has delivered respectable yields while keeping risk to a minimum. With more than 15 years of fixed-income experience, he’s built a respectable track record since taking the helm in 2003.

Largely eschewing highly rated bonds, Tiberii adds value by focusing primarily on corporate issues of middling quality, an area where bonds are often mispriced–about 30 percent of the portfolio’s holdings are A-rated and more than half are BBB-rated. Tiberii isn’t exactly a value investor. But he takes advantage of a deep bench of analysts at T. Rowe Price to seek issues in which the market has priced in an excessive amount of risk. 

But that doesn’t mean Tiberii has a cavalier attitude toward risk. The fund’s investment mandate allows him to allocate up to 15 percent of investable assets in junk bonds. However, he’s kept the junk bond holdings below that level, a solid indication that he’s keeping risk under control. Despite avoiding these higher-risk and higher-yield issues, the fund yields 4.6 percent.

His strategy proved a huge liability in 2008 when the fund turned in a 10 percent loss as investors flocked to Treasuries and AAA-rated bonds.

But Tiberii has found pockets of value amid the carnage, focusing heavily of late on debt issued by money center banks such as Citigroup (NYSE: C) and Bank of America (NYSE: BAC) as well as a smattering of regional and foreign banks. Tiberii reasons that as the economy improves so will the credit profile of financials. Thus far, the thesis has proven correct; defaults have slowed on all manner of consumer debt while deposits have risen. In the case of regional banks, the tighter regulation of the sector has actually improved these institutions’ financial and competitive positions. As a result, bank bonds have rallied over the past several months.

While seemingly embracing credit risk, Tiberii has moved the fund’s duration down to 6.3 years. Duration is a measure of interest rate sensitivity; bonds with longer durations are more heavily influenced by changes in interest rates. And with the Federal Reserve likely to tighten monetary policy later this year–either through rate hikes or more passive forms of tightening–this shorter duration will likely prove to be an advantage.

Over the course of his career, Tiberii has demonstrated an instinct for playing the bond market. In the years prior to the credit crisis, financing was relatively cheap. This led to a bevy of buyout deals and publicly traded companies that opted to go private. At the time, Tiberii invested mainly in firms that weren’t hungry for acquisitions or were too large to privatize. And his savvy credit analysis has allowed him to avoid defaults, even when the bond markets were ailing.

Still, investors should recognize the risks inherent in an investment in T. Rowe Price Corporate Income. Tiberii doesn’t hold much cash in the fund, opting instead to remain fully invested. Nor does he flee to safe-haven investments when the bond market runs into trouble.

He may also increase the fund’s exposure to junk bonds after prices in that segment of the fixed-income market begin to decline. Although the fund’s broad diversification does help protect investors against risk–the fund generally holds about 350 issues in the portfolio–it can suffer when credit markets seize, as they did a few years ago.