If Hollywood were to tell the story of the AB Global Bond fund, the synopsis might go something like this: A kid from Staten Island pays his way through college by working on the docks and driving an 18-wheeler. He studies information technology, thinking it’s a sure way to get a job in the late 1990s, and ends up analyzing risk for a large Wall Street firm. He works in relative obscurity until one day, a star portfolio manager, who’s just a few years older, but took a more traditional route to Wall Street, takes notice. Despite their different backgrounds, the two team up and transform an old-school bond fund into an investment success.

The postscript: Scott DiMaggio, 45, parlayed his computer skills into portfolio management and is now director of global fixed income at AllianceBernstein. That star manager, Doug Peebles, 51, was promoted to the firm’s chief investment officer of fixed income in 2004. They continue to work together as co-managers of the $5.2 billion AB Global Bond fund (ticker: ANAGX), which has averaged 4.8% annual gains over the past three years, better than 92% of its intermediate-bond peers.
The marriage of quantitative and fundamental investing is no longer unusual, but when DiMaggio joined AllianceBernstein in 1999, the role of a “data guy” was primarily in assessing risk. Peebles saw the potential to use quantitative models to achieve better risk-adjusted returns in what was becoming a more complex environment. “This was turn of the century and the advent of the euro. Trying to weigh the different economic cycles, credit risk, and currency risk was daunting,” says Peebles, who joined AllianceBernstein out of college and has managed the Global Bond fund since its 1992 inception. “It wasn’t enough to rely solely on fundamental analysis.”

After several years of testing and tweaking, Peebles added a quantitative component in 2004 and a year later promoted DiMaggio to co-manager.

The typical multifactor fund uses fundamental investing principles to build quantitative models. This fund gives two teams—one quant, one fundamental—autonomy to form two distinct views. At the same time, nine quantitative analysts use data to score individual securities and spot patterns, and the firm’s more than 50 fixed-income analysts look at securities and sectors through a fundamental lens. “The quant team is able to efficiently assess thousands of securities globally, but the fundamental team gives us depth in understanding what’s behind the numbers,” says DiMaggio.
In many cases, the two teams come to the same conclusions independently—and that’s reason to pursue a theme in a meaningful way. If the two views diverge, there is usually a good explanation. “A teammate explains it this way: The good thing about the quant tool is that it doesn’t read The Wall Street Journal,” DiMaggio says. But sometimes, that’s also the bad thing.

For instance, in the early days of the European debt crisis, the quant models flagged Greek sovereign debt as a buy, based on what were still BB+ credit ratings, plus yields rising into the low-double digits. The fundamentalists, however, had a very different thesis: They believed there was a 90% probability that Greece would fail. The managers avoided Greece.

The model proved more reliable at forecasting persistently low interest rates, even as strategists kept insisting—for years—that rates were about to rise. Only recently have the managers begun to position Global Bond for higher rates.

This isn’t to say the fund takes big macroeconomic bets. Quite the opposite. Soon after adding the quantitative component to their decision-making, Peebles and DiMaggio made two changes aimed at improving risk-adjusted returns. In 2006, they began hedging currency risk, after concluding that returns from currency added significant risk and detracted from returns. So while they make select investments in currency—early this year they came to the view that some emerging-market currencies were undervalued—their base position is to hedge currency risk.

In 2007, they expanded the fund’s mandate, so they could invest in multiple sectors. Investing exclusively in government bonds, as they did before, might sound like a low-risk approach, says Peebles, but in reality it requires making outsize country bets. “A multisector fund is significantly more diversified,” he adds. The fund owns some 1,000 securities from 500 issuers.

In the five years through Aug. 31, its standard deviation, a measure of volatility, was lower than 88% of Morningstar world bond funds’.

Today, more than 40% of the fund is in government bonds aimed at providing stability; Italy, Britain, and the U.S. are its top sovereign destinations. Half of the portfolio is earmarked for sectors that offer additional returns. 
One area on which quantitative and fundamental findings agree is the U.S. housing market’s strength. This view translates to a 6% stake in credit-risk transfer securities. Relatively new, these are similar to mortgage-backed securities, in that their underlying mortgages are conforming loans underwritten by the likes of Fannie Mae and Freddie Mac. The difference is that if the loans experience losses, the agencies aren’t on the hook. This adds risk—and an extra two percentage points in yield—but AB’s analysis suggests a low likelihood of default.

Yet, in another example of the data lining up with the story, the team shopped for “fallen angel” energy bonds in the first quarter of this year. Freeport McMoRan bonds were trading at $67 when they began buying in January 2016. (A bond is considered at par value at $100.) They rebounded in the spring, and the fund sold them at $96. The fund has since dialed back its high-yield energy exposure, but still has 2% of its assets in some of the sector’s investment-grade names.

Recently, the portfolio chiefs have shifted from virtually no emerging-market exposure to buying sovereign bonds in Argentina, Colombia, and Brazil. Global Bond began adding to its Brazilian holdings, which now account for about 4% of its assets, as bond prices plunged during former President Dilma Rousseff’s impeachment. The quantitative models identified 10-year yields—at one point, they were nearly 17%—as a global outlier. The scandal that felled Rousseff has wound down, and with it, so have yields, which were recently around 11%.