See Inside: Top-performing money managers: Q2 2012
Long-duration fixed income strategies continue to lead pack
The strategy dominated asset class for 4th straight quarter
By Melanie Zanona | August 20, 2012
Building: NISA's David Eichhorn said long-duration strategies act as a cornerstone.
Long-term bond strategies once again swept the best-performing fixed-income managers' ranking in the Morningstar Inc. separate account/collective investment trust database.
All 10 of the top-performing separate account strategies in the overall universe for the year ended June 30 were long bonds, making long-term strategies the top earners for the fourth straight quarter. Nine of the top 10 also appeared on the list the previous quarter, while the top three remained exactly the same.
“From the makeup of the top 10, there's obviously not much turnover,” said Diana Scott, data analyst at Chicago-based Morningstar Inc. “It's completely dominated by long-term bonds and long-term government.”
The lack of turnover among the leaders can be attributed to the current economic environment; when interest rates are low, bond values are higher. Although Ms. Scott said long-term bonds can be risky, she also pointed out they can produce strong returns when interest rates remain low.
“Long-duration strategies are clearly benefiting in what is considered a dismal and volatile market,” Ms. Scott said. “We know that the European sovereign debt crisis is on the forefront of everyone's minds, so it's almost obvious that investors seek safer mechanisms in fixed-income vehicles.”
For the year ended June 30, the median strategy among all domestic fixed-income separate account portfolios returned 7.01%; in the long-duration universe, the median for the 12 months was 20.88%. The Barclays Government/Credit index returned 8.79% in the period, while the BarCap Long Government/ Credit index returned 24.58%.
“When I see the headlines, it's easy to think everything did poorly,” Ms. Scott said. “But when looking at the numbers, it's interesting and informative to separate the emotional and headline-type issues and realize not everything is negative. There are some spaces in the economy for positive growth.”
The top two strategies in the overall universe belonged to St. Louis-based NISA Investment Advisors LLC. On top for the third straight quarter was the NISA 15+ STRIPS portfolio, with a one-year gross return of 57.3%. The strategy — which invests in Treasury STRIPS and zero-coupon securities that don't mature for at least 15 years — also finished fourth in five-year returns with an annualized 16.59%
The NISA long-duration government-only consolidated strategy was second, with a one-year gross return of 55.87%. The strategy also took the fifth spot on the five-year return list with an annualized 16.37%.
“While we are pleased with our performance relative to the chosen benchmark, the absolute performance of our long-duration accounts is a testament to our clients identifying the key role fixed income can play when managing the interest-rate risk inherent in pension liabilities,” said David Eichhorn, director of investment strategies at NISA, in an e-mailed statement. “Our clients continue to utilize long-duration strategies as the cornerstone of their interest-rate risk management strategies.”
NISA had a third strategy in the top 10; its long-duration government/credit consolidated portfolio ranked ninth with 29.7%.
Position stays firm
In third place, for the third straight quarter, was Hoisington Investment Management Co.'s macroeconomic fixed-income composite strategy, which had a gross one-year return of 44.66%. The strategy also tied for eighth for five years with an annualized 14.27% return. The strategy's investment decisions are based on the multiyear trend in the domestic inflation rate.
“Our portfolio has not changed over the past year,” said Lacy Hunt, executive vice president and vice chairman of the strategic investment committee at Austin, Texas-based Hoisington. “We have reaffirmed our position that a long-duration portfolio is the best approach in the current economic condition. Investors will be awarded for patience.”
Following Hoisington was Stamford, Conn.-based Hillswick Asset Management LLC's long-duration government strategy, at 37.46%. The strategy was sixth for five-year returns with an annualized 15.32%. The portfolio has a significant weighting in Treasury coupons and government-owned and -linked entities.
“The reason we have performed so well is that we managed duration,” said Mark McDonnell, president and senior portfolio manager at Hillswick. “Active management is how we got the horsepower to put additional returns against the benchmark.”
Mr. McDonnell said Hillswick added corporate debt weighting as spreads widened in June. He also noted that by adjusting the portfolio in the face of falling interest rates, the European crisis and nominal U.S. growth, the strategy experienced a positive rally over the past year.
Rounding out the top five was Jennison Associates LLC's active long government portfolio with a gross one-year return of 33.45%. The strategy also placed 10th on the five-year ranking with an annualized 14.22%.
The only newcomer to the one-year top 10 list was Ryan Labs Inc.'s long government enhanced portfolio, which came in sixth with 33.02%.
For the five years ended June 30, the top rankings also remained fairly homogenous; six of the 10 portfolios were crossovers from the first quarter.
CMG Capital Management Group Inc., one of the few newcomers to the list, led the five-year ranking with its SR Treasury bond program strategy, which had an annualized return of 24.38%. Steve Blumenthal, founder and CEO of Radnor, Pa.-based CMG, said the strategy relied on a systematic model that bases its investment decisions on the predicted direction of interest rates.
In second was TCW Group's securitized opportunities strategy, which had an annualized 23.86%. Following were: Reams Asset Management Co.'s long duration fixed income with 17.76%; NISA's 15+ STRIPS with 16.59%; and NISA's long-duration government-only consolidated, with 16.37%.
For the collective investment trust universe, the top one-year performers were BlackRock (BLK) Inc. (BLK)'s 20+ Treasury bond index fund at 37.22%, followed by its long government bond index fund at 31.57%.
Rounding out the top five for the one-year commingled universe were: Ryan Labs' long market enhanced, 26.81%; Pyramis Global Advisors' long duration commingled trust, 24.93%; and Wells Fargo's liability driven solution II, 24.16%.
For the 12 months ended June 30, the median overall domestic fixed-income return for collective investment trusts in Morningstar's data was 7.48%.
