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Special report

High-yield strategies continue their streak in the top 10

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Brian Kloss said Brandywine takes concentrated positions in undervalued credit securities.

High yield continued its dominance on the list of top-performing fixed-income managers in the year ended June 30, according to Morningstar Inc.'s separate account/collective trust database.

Seven of the top 10 fixed-income strategies in the separate account universe for the 12-month period were in Morningstar's high-yield bond categories. The top 10 also included two long-term bond strategies, while an ultrashort fixed-income strategy took the overall top spot.

“High-yield bonds obviously is dominating the top 10 (for) one year and it's true it's been the high-yield bond category that's been the highest performing category as a whole,” said Adam Baranowski, Chicago-based database leader for separate accounts and hedge funds at Morningstar.

The median return of all domestic high-yield strategies was 11.7%, up from the year-end high-yield median return of 7.65% as of March 31. The Credit Suisse High-Yield index returned 11.81% for the year ended June 30.

The 12-month median return for overall domestic fixed-income strategies was 5.02%, while the Barclays Capital Government/Credit index returned 4.28% in the same time period.

It is the third straight quarter in which the top 10 overall fixed-income strategies featured more high-yield strategies than all others combined. The second quarter's overall list featured nine high-yield strategies. While high yield has been dominating, it's not the only fixed-income category that has posted returns above beyond the overall median.

“We're starting to see long-term bonds” in the top 10, Mr. Baranowski said. “Long-term bonds actually had the second-highest (median) performance or return over the last one-year period at 9.84%.”

Mr. Baranowski also noted that of all global fixed-income strategies, emerging markets has done the best in the past year.

“What's not on the domestic list but has performed quite well in the past year is emerging markets bonds,” Mr. Baranowski said. “They have a median over the last year of 8.92% and really what's driving the one-year list has been some of the trends in the most recent quarter.”

One trend was emerging markets. In the second quarter, emerging markets were the highest performing category with a median return of 4.97%,followed by Morningstar's long-duration bond and long-government bond categories at 4.74% and 3.94%, respectively, said Mr. Baranowski.“High yield over that time period had only about a 2.41% median return, which is a little bit more in line with the median (overall) domestic, but they've had such strong quarters over the past year so that's what driving the (one-year) performance,” Mr. Baranowski said.

WAMCO still on top

For the second quarter in a row, leading the rankings for both the 12-month and five-year periods ending June 30 was Western Asset Management Co.'s U.S. index-plus strategy.

The strategy reported a gross return of 26.11% for the year ended June 30, and an annualized gross return of 25.16% for the five years ended June 30.

“It's in our fixed-income category but it doesn't fit neatly into a fixed-income peer group and really when you look into that strategy, there (are) two main components,” said Mr. Baranowski. “The first one is a short-term bond portfolio, which is why it's currently in the ultrashort bond category.” The other component is “a pretty significant exposure into S&P 500 futures,” he added.

Officials at WAMCO declined to comment.

Morgan Stanley strategies

Morgan Stanley (MS) Investment Management Inc.'s global high-yield strategy ranked second with a gross return of 18.03% for the year ended June 30, while the manager's U.S. high-yield strategy ranked fifth at 16.08%. The global high-yield strategy ranked third last quarter, while this is the first time the U.S. strategy has ranked in the top 10.

The manager's high-yield strategies focus on companies that have no more than $1 billion in outstanding debt, with about 125 to 135 issuers in the portfolio. About 85% of the names owned fall within the middle-market category, and the remaining 15% with large companies.

The global strategy consists of about 80% of the names in the U.S. strategy, which is why the global strategy is listed in the overall domestic fixed-income category. Morningstar assigns categories based on where the majority of holdings are placed.

In the global strategy, “the euro component is about 15%,” said Richard Lindquist, New York-based managing director, global head of high yield, in a telephone interview, “so we've been running about a 5% underweight to Europe.”

“Basically euro yields and spreads are lower than in the U.S.,” Mr. Lindquist said.

The “benchmark for global is also 5% emerging/Asia. There we're even weight on that benchmark,” Mr. Lindquist said. “Overweight on Asia, underweight in (Latin America). Asia has a better economic outlook currently than a lot of the countries in Latin America.”

New to the list is Brandywine Global Investment Management LLC's global credit strategy, which ranked third, with a gross return of 16.58% for the year ended June 30.

“This strategy is focused on identifying the cheapest asset class within credit and then sticking with what Brandywine historically has done,” said Brian Kloss, Philadelphia-based managing director and portfolio manager, fixed income. “We're looking to take concentrated positions and those undervalued securities within that asset class.”

Since January, the strategy has attributed much of its success to a European concentration, specifically “European mortgages, so European structured credit whether it's in Spain or Portugal or in the U.K.,” Mr. Kloss said.

“We're trying to identify those valuation anomalies with a very significant margin of safety that we're looking for,” said Mr. Kloss. “Buy it at a price that provides significant downside protection in a scenario that would be similar to a 2008.”

Franklin high yield

For the second quarter in a row, Franklin Templeton (BEN) Investments (BEN)' global high-yield strategy ranked fourth, with a 16.38% gross return for the year.

The strategy employs a research-based approach, which capitalizes on dislocations in high-yield fixed income and features exposure to the U.S., the U.K. and the eurozone with a broad spectrum of credit quality.

“Over the past year through 2Q 2014, while we remain constructive on high-yield credit fundamentals, our global high-yield strategy has moderated (its) beta positioning/ added to certain higher quality positions given the tightening in spread valuations in the high-yield market,” said Eric Takaha, San Mateo, Calif.-based senior vice president and director of corporates and high yield at Franklin Templeton, in an e-mail.

“The energy industry remains a meaningful overweighted position for the strategy given our assessment for downside asset support and the potential for credit enhancing consolidation in that industry,” Mr. Takaha said.

For the five years ended June 30, ranking second behind WAMCO's U.S. index-plus strategy was Pyramis Global Advisors' high-yield commercial mortgage-backed securities strategy, with a gross annualized return of 19.22%.

The rest of the top five top-performing separate accounts for the five years ended June 30 were: Manulife Asset Management North America Ltd.'s U.S. high-yield fixed-income strategy, with an 18.81% gross annualized return; TCW Group's securitized opportunities strategy, 18.36%; and Advisors Asset Management Inc.'s credit opportunities strategy, 18.04%.

The median return for the five years ended June 30 for overall fixed-income strategies was an annualized 5.89%, while the Barclays Capital Government/Credit index returned 5.09%.

For collective investment trusts, J.P. Morgan Asset Management (JPM)'s long credit fund topped the list with a one-year net return of 14.16% as of June 30.

The rest of the top five collective investment trusts for the year were: BlackRock (BLK)'s long corporate bond fund, with a net return of 13.48%; Shenkman Capital Management's Four Points multistrategy fund, 12.95%; and J.P. Morgan Asset Management's high-quality long credit fund and long-duration credit fund with net returns of 12.43% and 12.38%, respectively.

The median return for the year ended June 30 for collective investment trusts was 4.71%.

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 separate accounts@morningstar.com or call 312-384-4087.

This article originally appeared in the August 18, 2014 print issue as, "High-yield strategies continue their streak in the top 10".