See Inside: Top-performing money managers: Q4 2012
Fixed income: High-yield bonds continue reign amid low-interest-rate environment
By Melanie Zanona | February 18, 2013
Scott Austin cites the non-agency mortgage market as driving the strategy’s success.
High-yield bond strategies continued to dominate the top fixed-income managers' ranking for the year ended Dec. 31, according to Morningstar Inc.'s separate account/collective investment trust database.
Six of the top 10 in the one-year returns were high-yield bond strategies; the rest were ultrashort, short, intermediate and long-term bond strategies.
Long-term bonds had dominated the rankings for four straight quarters but were overtaken by high-yield strategies in the year ended Sept. 30.
“Last quarter, high yield was starting to crawl in, mostly at the bottom,” said Andy Kwon, a data analyst at Chicago-based Morningstar. “But now when you look at the most recent quarter, most of the top five are high yield.”
The shift toward high yield can be attributed to low interest rates and investors willing to take on more risk in favor of greater returns.
“The fixed-income market hasn't really provided much return to investors due to the economy and interest rates,” Mr. Kwon said. “So if people are looking to make a decent return, they're going to have to make more risky investments. Long-term bonds just aren't able to outperform high yields, but that doesn't mean high yields are for everyone. They are riskier.”
Even though high yield first began to dominate in the previous quarter, most of the top-performing managers for the year ended Dec. 31 were newcomers to list; only three strategies also appeared in the top 10 rankings for the year ended Sept. 30.
“I think that idea of having more risk and having a higher return is playing a big part in the market,” Mr. Kwon said.
For the year ended Dec. 31, the median return among all domestic fixed-income separate account portfolios was 6.32%; in the high-yield universe, the median return for the 12 months was 15.25%. Meanwhile, the Barclays Government/Credit index returned 4.82% in the period, and the Credit Suisse High Yield index return returned 14.71%.
Although median returns were positive, Mr. Kwon suspects they might start to dip into the negative side in 2013.
“July was the highest median, and it started to slide down from there,” Mr. Kwon said of 2012. “It's hard to say if the trend will remain, but we might see it start to go to the negative side.”
TCW Group
The top performer for the one-year returns was TCW Group Inc.'s Opportunistic MBS high-yield bond strategy, with a gross return of 32.38%.
“In 2012, our success was driven by great performance in the non-agency mortgage market,” said Scott Austin, senior vice president in the mortgage-backed securities group at Los Angeles-based TCW. “There was a pocket of illiquidity in the end of 2011 that we took advantage of, and we were well positioned into 2012 with those assets.”
The portfolio is exclusively focused on non-agency mortgages, which are not guaranteed by the government and are typically traded below par, according to Mr. Austin.
“The non-agency market, we believe, is still one of the best risk-adjusted assets in U.S. fixed income,” he said.
The portfolio is just one of three crossovers from the previous quarter's rankings; for the year ended Sept. 30, TCW's opportunistic high-yield strategy came in sixth with a gross return of 23.8%.
(The other crossovers in the rankings were Western Asset Management Co.'s U.S. Index Plus ultrashort bond portfolio, which was No. 6 for the year-ended Dec. 31 with a gross return of 22.16%, down from 35.52% and a first-place ranking the previous quarter; and the Nomura Corporate Research & Asset Management Inc. High Yield Total Return Institutional ranked eighth, with 21.36%, as of Dec. 31 and fourth, with 25.08%, in the Sept. 30 ranking.)
TCW also had a securitized opportunities long-term government bond portfolio that ranked fifth among domestic fixed-income strategies for the year ended Dec. 31, with a gross return of 23.42%. The same strategy also ranked first in the five-year rankings with an annualized 23.11%.
“We're very happy with how we're positioned for the upcoming year,” Mr. Austin said. “2013 is going to be a year of adding alpha by picking specific securities.”
Other than asset-backed securities, Mr. Austin said TCW also expects to use shipping-backed securities, student loan securities and aircraft securities.
Brookfield Investment
In second place for the one-year ranking was the opportunistic MBS short-term bond portfolio of New York-based Brookfield Investment Management Inc., with a gross return of 29.29%.
The strategy primarily focused on mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities.
“While the fourth quarter was a period of generally positive performance for risky assets, the strategy's allocations within MBS, which were focused on particular mortgage servicer concentrations and certain regional concentrations, were rewarded,” said Michelle Russell-Dowe, managing director and a portfolio manager for the Brookfield strategy. The portfolio is a newcomer to the one-year rankings, where it is the only short-term bond strategy in the top 10 list.
Rounding out the top five were the Toronto-based Manulife Asset Management's U.S. high-yield fixed-income portfolio, with a gross return of 27.49%, followed by the high-yield strategy of Wilmington, Del.-based DuPont Capital Management Corp., with a gross return of 23.85%.
For the five-years ended Dec. 31, TCW's securitized opportunities portfolio led the pack, and in second place was Capital Management Group Inc.'s system research Treasury bond program.
“It is a systematic trading strategy that takes a look at determining whether interest rates are moving up or moving down,” said Steve Blumenthal, founder and CEO of the King of Prussia, Pa.-based CMG. “If interest rates are moving lower, then the value of bonds moves up in price.”
The long-term bond strategy — which placed first in the previous quarter's five-year ranking — returned an annualized 21.42%.
Mr. Blumenthal also said the strategy uses a quantitative process to capture inflationary trends and bases investment decisions on the prediction of interest rates.
In third was Columbus, Ind.-based Reams Asset Management Co. LLC, with its long-duration fixed-income portfolio returning an annualized gross 16.81% for the five years ended Dec. 31.
The five-year rankings were primarily dominated by long-term bond portfolios; six strategies were long term, although high yield pushed its way into the rankings taking the remaining for spots in the top 10.
Following Reams were Clark Capital Management Group Inc.'s Navigator fixed-income total return portfolio, a high-yield strategy, with a 14.82% annualized gross return and Delaware Investments' long-duration bond portfolio, 14.54%.
The median for the five years was an annualized 6.61%; the index returned 6.06% for the period.
Collective investment trusts
For the collective investment trust universe, the top one-year performers were Brandywine Global Investment Management's credit opportunity fund at 15.79%, followed by Neuberger Berman Asset Management's high-yield fund at 15.7%.
Rounding out the top five for the one-year commingled universe were J.P. Morgan's high-yield fund, at 15.16%; Pyramis Global Advisors' high-yield core institutional fund, 13.86%; and Wellington Management's high-yield bond fund, 13.43%.
For the 12 months ended Dec. 31, the median overall domestic fixed-income return for collective investment trusts in Morningstar's database was 6.02%. n
This article originally appeared in the February 18, 2013 print issue as, "Fixed income: High-yield bonds continue reign amid low-interest-rate environment".
