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Special Report

High-yield strategies again reign supreme

StephenKane
TCW Group’s Stephen Kane

High-yield strategies retained their dominance in the domestic fixed-income rankings of top-performing managers for the fourth consecutive quarter, according to Morningstar Inc.'s separate account/collective investment trust database.

For the year ended Sept. 30, eight of the top 10 fixed-income strategies in the separate account universe were in Morningstar's high-yield bond category. For the year ended June 30, nine of the top 10 were high-yield.

High yield also ruled the five-year rankings, holding nine of the top 10 domestic fixed-income spots for the period ended Sept. 30.

"Risk was rewarded in the third quarter. Relative to other bond sectors, high-yield credit did really well and emerging markets, especially local currency, did well. That can make a difference for a core-plus manager with even the slightest exposure to those markets," said Emory Zink, fund analyst, fixed-income strategies at Morningstar in Chicago.

The Bank of America Merrill Lynch U.S. High Yield Master II index returned 9.04% for the year ended Sept. 30. The median domestic high-yield return in the Morningstar universe was 8.39% and the median return for Morningstar's entire domestic fixed-income universe was 1.11% for the year.

Ms. Zink said volatility remained low for much of the year ended Sept. 30, but managers expect that this won't always be the case.

"A lot of core bond managers, and anyone who holds a lot of mortgages, they keep waiting, expecting volatility. But volatility is staying low," she said.

Ms. Zink said most managers also expect to see another increase in the federal funds rate before the year is over. "The expectation of a December rate hike is up to 70%," she said.

The Federal Open Market Committee kept the federal funds rate at a 1% to 1.25% range at its September and October/November meetings, after raising rates by 25 basis points each at two earlier meetings in 2017.

Ms. Zink said the Fed has been "very deliberate and transparent in signaling that interest rates are going to continue to rise, steadily. And every quarter-percentage point it is raised draws a lot of attention — for good reason."

While volatility and the Fed are often discussed, Ms. Zink pointed to the continued demand from international investors for long-term U.S. Treasuries and for some U.S. tax-exempt municipal bonds as other notable factors that continue to affect bond prices.

For the third quarter in a row, TCW Group Inc.'s AlphaTrak strategy topped the domestic fixed-income list with a gross return of 23.8% for the one-year period ended Sept. 30.

Morningstar classifies AlphaTrak as ultrashort fixed income but TCW considers it an enhanced equity indexing strategy that uses S&P 500 futures to get equity index exposure while short-term fixed-income securities are actively managed to enhance returns above the index.

"Strong returns in the S&P 500 is what's driving returns here. We do some enhancement with short-term fixed income and it's been a good environment. There's been a good appetite for risk and fixed-income sectors have performed well," said Stephen Kane, group managing director and generalist portfolio manager in the fixed-income group at TCW in Los Angeles.

The S&P 500 returned 18.61% for the year ended Sept. 30.

For the second consecutive quarter, high-yield strategies from DDJ Capital Management LLC held both the second- and third-place spots on the one-year list.

With a one-year gross return of 14.79%, Waltham, Mass.-based DDJ Capital's Total Return Credit II Composite was in second place and the firm's U.S. Opportunistic High Yield Composite was in third place with 14.54%.

"It continues to be a good environment for our strategies," said John W. Sherman, assistant portfolio manager of the opportunistic high-yield strategy. "We have a deep value approach to picking the individual names, and most of our outperformance is attributed to security selection."

DDJ's opportunistic high-yield strategy was also in 10th place on the five-year list, with a gross annualized return of 8.13%.

"We focus on the lower tier of the middle market, with a bottom-up approach to researching these names. It's led to strong performance in this quarter but also over the history of the strategies," said Benjamin J. Santonelli, portfolio manager of the total return credit strategy and assistant portfolio manager of the high-yield composite.

Mr. Santonelli said the health-care and industrial sectors contributed to the strategies' outperformance, but he emphasized security selection as the driving factor behind the portfolios' performance.

"There's no road map that we're following. It's on a security-by-security basis," Mr. Santonelli said.

Rounding out the top five, MacKay Shields LLC's Select High Yield Composite was in fourth place with a one-year gross return of 12.84% and Thomas J. Herzfeld Advisors Inc.'s Taxable Closed-End Bond strategy was in fifth place with a 12.52% return.

For the five years ended Sept. 30, TCW's AlphaTrak topped the list for the second consecutive quarter with a gross annualized return of 16.51%.

The S&P 500 returned 14.22% for the five-year period ended Sept. 30. All multiyear returns are annualized.

TCW's Mr. Kane said that although AlphaTrak's performance is primarily due to equity index performance, those returns have been enhanced by active management of the strategy's short-term fixed-income component.

"The enhancement has been approximately 1% per year over the S&P 500 index," he said.

AlphaTrak's fixed-income component is diversified across bond issues including Treasuries, short-term corporate bonds, asset-backed securities, and agency and non-agency mortgage-backed securities.

TCW's Opportunistic Mortgage-Backed Securities strategy was in seventh place on the five-year list with a net annualized return of 7.67%.

Mr. Kane said the opportunistic MBS strategy "focuses exclusively on the non-agency residential MBS market and we still like the mortgage sector."

T. Rowe Price's Europe High Yield Bond strategy was in second place with an 8.99% five-year return. Morningstar said the T. Rowe Price strategy is in the domestic bond category due to the yields it produces, its credit ratings and the fact that it is domiciled in the United States.

The Select High Yield Composite from MacKay Shields was third on the five-year list at 8.84%, Nomura Corporate Research and Asset Management Inc.'s High Yield Total Return Institutional strategy ranked fourth with a 8.47% return, and Morgan Stanley (MS) Investment Management's U.S. High Yield strategy completed the top five with an 8.43% return for the five-year period.

The Bank of America Merrill Lynch U.S. High Yield Master II index returned an annualized 6.39% for the five years ended Sept. 30. The median domestic high-yield return in the Morningstar universe was 6.21% for the five-year period and the median return for Morningstar's entire domestic fixed-income universe was an annualized 2.55%.

In the collective investment trust universe, DDJ's Total Return Credit I Composite led all domestic fixed-income managers for the year ended Sept. 30 with a net return of 14.21% and topped the list of domestic fixed-income managers for the five-year period with a net return of 8.02%.

DDJ's strategy also led the lists for the one-year and five-year periods ended June 30.

"It's about credit selection. We buy good companies based on exhaustive fundamental research," Mr. Santonelli said.

J.P. Morgan Asset Management (JPM)'s JPMCB Public Bond Fund was in second place on the CIT list at 10.39% for the year ended Sept. 30; Shenkman Capital Management Inc.'s Four-Points Multistrategy Fund was third with a net return of 9.41%, Capital Group Cos.' Global High Yield fund claimed the fourth spot in the one-year rankings at 9.19%, and BNY Mellon Investment Management's EB DV High Yield Beta Fund rounded out the top five with a 9% return.

For the five years ended Sept. 30, J.P. Morgan's JPMCB Corporate High Yield fund was in second place with a net 6.67% return, followed by Eaton Vance (EV) Corp.'s EB High Yield at 6.6%; BNY Mellon's EB DV High Yield Beta Fund, 6.24%; and J.P. Morgan's JPMCB High Yield trust was fifth with a net 6.07% return for the five-year period.

The median return for fixed-income CITs in Morningstar's universe was 0.77% for the year and 2.58% for the five years ended Sept. 30.

All data for Pensions & Investments' top-performing managers report are provided from Morningstar's global separate account/collective investment trust database. The data for the rankings on which this story is based were pulled Oct. 25.

Top-performing managers: overall U.S. fixed income
One-year returnCategoryGross
return
Net
return
TCW Alpha TrakU.S. SA ultrashort bond23.80%22.69%
DDJ Total Return Credit II CompositeU.S. SA high-yield bond14.79%12.79%
DDJ U.S. Opportunistic High Yield Comp.U.S. SA high-yield bond14.54%13.96%
MacKay Select High Yield CompositeU.S. SA high-yield bond12.84%12.28%
Herzfeld Taxable Closed-End BondU.S. SA intermediate-term bond12.52%11.54%
PineBridge High Yield Bond CompositeU.S. SA high-yield bond12.18%11.68%
Nuveen High Yield Fixed IncomeU.S. SA high-yield bond12.12%11.57%
Horizon High Yield Opportunity Inst'lU.S. SA high-yield bond12.03%10.91%
Global High YieldU.S. SA high-yield bond11.38%10.82%
Logan Circle High YieldU.S. SA high-yield bond10.89%10.35%
 
Five-year returnCategoryGross
return
Net
return
TCW Alpha TrakU.S. SA ultrashort bond16.51%15.98%
T. Rowe Price Europe High Yield BondU.S. SA high-yield bond8.99%8.44%
MacKay Select High Yield CompositeU.S. SA high-yield bond8.84%8.30%
Nomura NCRAM HY Total Return Inst'lU.S. SA high-yield bond8.47%7.94%
Morgan Stanley (MS) U.S. High YieldU.S. SA high-yield bond8.43%7.51%
Lord Abbett High Yield OpportunisticU.S. SA high-yield bond8.43%7.54%
TCW Opportunistic MBSU.S. SA high-yield bond8.43%7.67%
Oaktree European High Yield BondsU.S. SA high-yield bond8.39%7.85%
Federated Opportunistic High Yield Comp.U.S. SA high-yield bond8.31%7.78%
DDJ U.S. Opportunistic High Yield Comp.U.S. SA high-yield bond8.13%7.57%