As the price of oil plummeted last fall, sending markets whirling and anxious ears straining to hear the word “patient” fall from Janet Yellen’s lips, FA asked managers across the country what lay ahead for their bond portfolios in 2015. Most analysts, strategists and portfolio managers, though poised for a major shift in credit markets and rising interest rates, weren’t abandoning bonds. Many say that the era of the active bond manager is here, as is the moment for fund managers to shed the constraints of traditional benchmarks. And financial advisors, they say, should awake to the imminent return of significant risk in the risk/reward ratio they’ve enjoyed for so long.

TCW’s Bryan T. Whalen, CFA, a generalist portfolio manager in TCW’s U.S. fixed-income group, is confident that “the earliest liftoff” of the Fed’s rate rise for Treasurys won’t arrive until June. More immediately, Whalen was put off by the current cost of credit products, especially overpriced credit and high-yield securities.

“Across the board, we’re getting paid less to take risk in these markets,” says Whalen, whose group manages the TCW Total Return Bond Fund and the MetWest Total Return Bond Fund. The MetWest fund won the U.S. 2014 Lipper Fund Award for its 10-year performance among “core plus” bond funds.

“If oil prices stay down over the course of 2015, there’s a high probability we’ll see some of the names in default,” says Whalen. But Whalen says, as did Yellen, that extreme reactions to oil prices will probably be contained and turn out to be a major positive for consumer spending.

For the New Year, his team favors asset-backed and non-agency mortgage-backed securities. “Non-agency MBS offer good fundamental value today on both an absolute basis as well as relative to other sectors of the fixed-income market,” he says. “They offer decent yields and some price appreciation potential. We find value in higher quality ABS as defensive securities that offer minimal price upside but are safe, liquid investments at a reasonable yield relative to Treasurys.”

One type of ABS Whalen likes is senior, floating-rate instruments secured by student loans guaranteed through the federal government’s Federal Family Education Loan Program (or FFELP).

“We think it’s crucial for investors to diversify their yield curve exposure by investing abroad,” says Chris Diaz, head of global rates for Janus Capital and the portfolio manager of the Janus Global Bond Fund, a multisector fund that seeks risk-adjusted returns and capital preservation. He is focusing on areas where the European Central Bank is expected to start large-scale bond buying, similar to the program the U.S. is winding down. The fund in December had a 55% weighting in Europe.

Diaz is finding an array of opportunities on the continent that maybe global investors consider calcified, including European nations that have struggled such as Spain, Portugal and Ireland, “where restructuring was quite painful, but there has been a greatly improved economic outlook,” says Diaz. At the same time, he is also invested in core European countries like Germany and France. “I’m not suggesting that the euro crisis is over, but it’s much improved since the 2012 period.”

The team favors European sovereigns and corporate bonds, largely in the financial sector. The fund’s flexible mandate will allow the team to increase its emerging markets weighting up to 30% when prices and yields become more attractive than they are today. The weighting is nearly zero now.

In his own outlook, Diaz wrote, “Once rates start to rise, it’s difficult for a fixed-income portfolio to make up lost ground if it’s not already positioned for higher rates. We think it’s crucial for investors to diversify their yield curve exposure by investing abroad.” He tells Financial Advisor, “The important areas for getting 2015 right won’t come from what we own, but what we do not own.”

Something new for Janus this year is the presence (albeit distant) of Bill Gross as the firm’s new EVP. Gross, the recently departed CIO of Pimco, will work in Newport Beach, Calif., instead of Janus’s headquarters in Denver.

Anthony Valeri, an investment strategist for LPL Financial, is anticipating a flat-return environment in 2015, so he’s looking to high-yield bonds and bank loans for growth. “The loans yield 4.5% or so and offer no interest rate risk,” says Valeri. Most of the loans are by corporate borrowers looking for short-term lending. “Lower-rated bonds can help investors manage a challenging bond market,” he says. He’s interested in good corporate fundamentals and low default risk for the 3% to 5% allocation.

Municipal and investment-grade corporate bonds also are doing better than comparably priced Treasurys, he says. “The market supply of muni bonds is anemic, yet demand for tax-exempt income is as high as ever,” although issuance did pick up somewhat late in the year. The yields will be 1% to 3%, “a little better than Treasurys,” says Valeri. “It’s prudent to expect weaker bond returns.”

Tony Destro is a portfolio manager for Lockwood Advisors Inc., a registered investment advisor and affiliate of Pershing and BNY Mellon that currently manages $12 billion in mutual fund wrap and unified managed account platform assets.

“We won’t see higher coupon returns due to today’s rising interest rates,” says Destro, who expects a prolonged period of rising rates over the next several years.

“Active managers within fixed income tend to fare best in rising interest rate environments,” says Destro, “especially with concerns over liquidity.” That’s why he’s gravitating toward “opportunistic bonds” for yield, an asset class Morningstar calls “a non-traditional opportunity set.” His research group looks for non-benchmark-centric active managers who are free to choose securities and strategies outside the Barclays U.S. Aggregate Bond Index and who are specialists in a non-traditional segment of the fixed-income market or strategy.

As the country moves toward higher interest rates, Lockwood is transitioning his clients from index ETFs to mutual fund wraps and actively managed mutual fund portfolios. Lockwood is seeking to mitigate interest rate sensitivity in its portfolios with shorter duration bonds and floating-rate bank loans. “We’re combating the rate risk through asset allocations,” says Destro, allocating to such things as floating-rate bond mutual funds and emerging market debt.

At BlackRock, the largest provider of passive and active ETFs, chief investment strategist Jeffrey Rosenberg expects “falling oil prices to function as a stimulus package for the U.S. economy,” which will allow the Fed to offer less support.

Fed rate hikes will have the largest impact on shorter maturity bonds, while the impact on longer duration bonds is uncertain due to low global yields and the decline in fixed-income supply, says Rosenberg. “Advisors have been crowding into shorter-term debt for the last five or six years because of the success that was underwritten by a zero rate policy, but BlackRock questions whether this strategy will continue to be successful,” he says. When the rate rises from zero, investors who have been used to low volatility due to ZIRP may need to brace for a new investment environment.

“We’ve had complacency in the financial markets for years, thanks to zero interest rates,” Rosenberg says. “While it’s not 2008 again, we are having a game-changer and a dramatic repricing of financial instruments resulting in changing allocations. There will be big theme rebalancing in bond strategies and rapid repricing of risk.” Overall, though, he says the U.S. economy is looking better. “The U.S. financial markets and USD-denominated assets will be a better place than European and emerging markets.”

One fund receiving strong inflows of $2.4 billion in 2014 was the Loomis Sayles Core Plus Bond Fund, co-managed by Peter W. Palfrey and Richard (Rick) G. Raczkowski, who have run the fund for more than 15 years.

“The cost of manufacturing just went down 45%,” Palfrey says with delight about oil sliding below $55 a barrel. That oil slide spooked investors at first, causing a slide, but the markets have since rebounded.

Palfrey and Raczkowski have been focused on how to find yield when the Barclays U.S. Aggregate Bond Index has been yielding only 2.2%. They like investment-grade, high-yield and emerging market bonds—even those EM bonds in non-dollar securities. Mexico is attracting new manufacturing money that had been going to China, where production costs have gone up, says Palfrey. Mexican labor costs have fallen 12% to 15%, he says.

Deciding that “the U.S. government sector as a whole has become very expensive here,” Palfrey and Raczkowski have allocated just over 30% of the portfolio to the U.S. government market, including Treasurys, agencies and agency MBS—a large underweighting, considering that the index weighting for these three sectors is 70%. Three percent of the government portfolio is in 30-year Treasury Inflation-Protected Securities (TIPS). These Treasury-backed instruments are outside the benchmark, but a favorite with Palfrey, who considers them “attractive long-term inflation protection.”

The fund also has a 30% position in investment-grade credit. It has about 20% in high-yield, 3.5% of which is floating-rate bank loans and the rest of which is in fixed-rate high yield. Another 10% of the fund is in securitized credit (ABS and CMBS).

About 8% of the fund is in emerging markets (in investment-grade countries, paid in local currencies). Of that 8%, 4% is in Mexican peso government debt, 3% is in Brazilian  “AAA”-rated super-national debt, 1% is in Philippine investment-grade government  bonds and 2% is in cash.

Sectors such as high-yield, non-dollar holdings, bank loans, TIPS and other allocations outside the index have historically represented about 18% of the Core Plus portfolio (hence the name, “Core Plus.”) Yet, “These allocations have generated 46% of the fund’s returns over the benchmark over the past 10 years,” Palfrey says.

Sector-wise, “energy stocks and bonds also will be extraordinarily attractive,” in 2015, says Palfrey. “Refiners, midstream pipe providers, oil field servicers, drillers ... all will do rather well based on where they’re priced today.”

We’ll have to wait and see.