Special report

Fixed income: Little change among bond strategies, with high yield filling 4 of top 10

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Michelle Russell-Dowe said the CMBS strategy benefited from improvements in the real estate market.

High-yield strategies maintained their dominance among the 10 best performing fixed-income managers for the year ended June 30, according to Morningstar Inc.'s separate account/collective trust database.

Indeed, there were few changes in the rankings from the previous quarter.

Four of the top 10 portfolios were high yield, while two were short term, two were ultrashort, one was long government and one was intermediate; the exact same makeup as the prior quarter.

“The top 10 managers were almost identical, just a different order,” said Andy Kwon, data analyst at Chicago-based Morningstar. “High yield seems to be dominating, but if you drill down into it by corresponding months, it had its lowest periods (in April, May and June) than in the last nine months.”

The median return for domestic high-yield bonds in the quarter ended June 30 was -1.22%, down from 2.79% in the previous quarter. Meanwhile, the median return for limited duration was -0.45% for the quarter ended June 30, intermediate duration was -2.24%, and long duration was -5.67%.

The median return among all domestic fixed-income separate account portfolios was 0.94% for the 12 months and -1.93% for the quarter ended June 30. The Barclays Capital Government/Credit index returned -0.62% for the year and -2.51% for the quarter; the Credit Suisse High Yield index returned 9.18% for the year and -1.38% for the quarter.

“The trend (in fixed income) seems to be moving down, and moving down pretty fast,” Mr. Kwon said. “There are a ton of negative returns, so that's where all the weight is sitting.”

CMBS at top

Although high-yield bonds snagged the most spots in the overall ranking, the leader for the year was the commercial mortgage-backed securities composite of New York-based Brookfield Investment Management Inc., with a gross return of 29.65%.

The strategy ranked ninth in the year ended March 31, with a gross return of 17.02%. (All figures reported in this story are gross returns; data for periods of more than one year are annualized.)

“Mortgage credit, both residential and commercial, has begun to demonstrate the tremendous value that comes from improvements in the real estate markets and improvements in access to credit,” said Michelle Russell-Dowe, managing director and head of structured products at Brookfield.

The firm's opportunistic MBS portfolio also made the top 10 list, coming in third with 24.63%.

Ms. Russell-Dowe said the success of the strategies has mostly come from targeting “regions, properties and borrowers that are now just beginning to see improvements in access to credit.”

In second place was TCW Group Inc.'s Opportunistic MBS strategy, with a gross return of 27.53%, down slightly from 29.4% the previous quarter.

The portfolio, which focuses on non-agency residential mortgage-backed securities, did particularly well in the fourth quarter of 2011 by becoming more aggressive with bonds and raising the risk profile as market prices decreased, according to Scott Austin, senior vice president of fixed-income at TCW, Los Angeles.

TCW had two other portfolios in the top 10: the MetWest AlphaTrak strategy came in fifth with 23.64% and the TCW Securitized Opportunities bond portfolio returned 18.02%, ranking ninth.

“We've constructed strategies that have little to no sensitivity to interest rates,” Mr. Austin said. “So performance will continue to do well regardless of if interest rates move up or down.”

Similarly, the fourth place U.S. Index Plus strategy of Western Asset Management Co. won't let climbing interest rates force immediate adjustments to the portfolio.

“We think the market has overreacted (to interest rates) and we think explicit tightening is a year and a half away, if not more,” said Dennis McNamara, portfolio manager of Pasadena, Calif.-based WAMCO. “So on the front end, we think our strategy is still appropriate.”

The portfolio, which returned 23.83%, for the 12 months is “different from a traditional bond strategy” in that it uses its equity exposure to invest in ultrashort bonds. While most of the returns for the year ended June 30 came from equity, the remainder came from non-agency mortgages and investment-grade credit. Morningstar classifies it as an ultrashort bond strategy.

2 newcomers

There were two newcomers to the top 10 list for the periods ended June 30: Manulife Asset Management's high-yield fixed-income strategy, in eighth place with 18.49%; and Advisors Asset Management's credit opportunities high-yield bond strategy, ranking 10th with 16.02%.

For the five years ended June 30, TCW's securitized opportunities strategy came in first with an annualized return of 22.47%, while the firm's opportunistic MBS strategy came in third with 14.89%.

The only other crossover from the one-year ranking was Brookfield's CMBS composite, which came in eighth at 13.5%.

The median 5-year return among all fixed-income separate account strategies was an annualized 5.9%. The BarCap Capital Government/ Credit index returned 5.29% for the same period.

In second place for the five years ended June 30 was Reams Asset Management Co. LLC's long-duration fixed-income portfolio, with 15.26%.

“The five-year period includes some interesting market environments, including the financial crisis and the European crisis,” said Mark Egan, managing director of Columbus, Ind.-based Reams. “We've used a lot of market volatility to our advantage, mostly in long credit.”

In the past six months, however, Mr. Egan said the firm has dialed back to a lower risk portfolio, because investors are “not being compensated right now to take too much risk.”

Rounding out the top five were Braver Capital Management's tactical high yield bond with 14.67%, and Clark Capital Management Group's Navigator fixed-income Treasury portfolio with 14.17%.

For collective investment trusts, the top performing strategy was Amalgamated Bank's ultra construction loan strategy, with a one-year return of 12.62%, followed by Brandywine Global Investment Management's credit opportunity fund at 11.74%.

Rounding out the top five were J.P. Morgan Chase's high-yield fund, with 9.95%; Pyramis Global Advisors LLC's leveraged loan pool strategy at 9.9%; and Neuberger Berman's high-yield bond fund at 9.16%.

The median return among CITs for the year ended June 30 was 0.45%, and for the five years, 5.72%.

All of the data for Pensions & Investments' quarterly “Top Performing Managers” report are provided from Morningstar Inc's global separate account/collective investment trust database. For information on the database, please contact separateaccounts@morningstar.com or call (312) 384-4087.

This article originally appeared in the August 19, 2013 print issue as, "Fixed income: Little change among bond strategies, with high yield filling 4 of top 10".