Traditional bond investors have lost money for years. These five-star portfolio managers show a better way.

A fixed-income team at Morgan Stanley points to distressed debt and frontier local-market investing as key drivers of their fund's returns, according to a report on their approach. The claim is notable because traditional bond investors have struggled for years, with many core fixed-income strategies delivering weak or negative real returns in a prolonged low-yield environment.

Distressed debt involves buying the obligations of companies or issuers in financial difficulty at a discount, accepting higher credit risk in exchange for potentially higher returns if the issuer recovers or restructures favorably. Frontier local-market investing means holding bonds denominated in the currencies of smaller, less-developed economies — markets that often offer higher yields than developed peers but come with added currency, liquidity, and political risk.

For readers, the takeaway is less about copying a specific strategy than understanding the trade-off: these approaches can diversify a fixed-income allocation, but they carry risks that plain government or investment-grade bonds do not. What to watch: whether such returns persist if credit conditions tighten, and how currency moves affect frontier-market holdings.