Rattled by volatile interest rates, a weak dollar and the threat of inflation, traditional bond managers took a back seat to guaranteed investment fund managers during the second quarter, according to the Pensions & Investments Performance Evaluation Report.
Eight of the top 10 performing PIPER commingled funds in the second quarter were GIC/stable value funds, while seven of the top 10 commingled funds for the 12 months ended June 30 were GIC funds.
But the top performing commingled fixed-income fund for the quarter and the year was a commercial mortgage fund managed by General American Life Insurance Co., St. Louis. It returned 2.1% for the quarter and 8.53% for the year.
The median PIPER commingled fixed-income fund returned an unimpressive -0.9% for the quarter and -0.3% for the year ended June 30. The PIPER commingled fixed-income universe includes 194 accounts.
Shelby County Government Investment Management topped the overall PIPER managed fixed-income account results for the quarter with 4.11% and finished first for the year with 14.45%. For the quarter, Putnam Investments Inc.'s tax-exempt fixed-income portfolio finished second overall with 1.4%, followed by Advisers Capital Management Inc.'s limited duration portfolio at 1.12%.
For the year, the Hotchkis and Wiley low-duration portfolio finished second overall with 7.82%, followed by Bell Capital Management Inc.'s managed bond portfolio at 6.57%.
The Salomon Broad Bond Index returned -0.97% for the quarter and -1.18% for the year.
William Templeton, consultant with Towers Perrin, Atlanta, said he is "not surprised" GIC funds did well for the year because pooled GICs are carried at book value and, because GICs are not marked to market, do not fluctuate in value with the rise and fall of interest rates as do bonds.
"During a major bear market like we have had this year, something that's insulated from that will look very good," said Mr. Templeton. "The more defensive you were during this period, the better you look."
Kelli Hueler, president of Hueler Analytics, a GIC consulting and research firm in Minneapolis, said GIC funds usually do well in down market periods.
"There is no question that book value is attractive since you have interest accrual and no devaluations as interest rates rise as you do in market value bond funds. The real benefit of having stable value funds, or book value, is that volatility is removed from the equation," she said.
Among PIPER managed accounts, defensive-oriented, limited-duration managers and short-term fixed-income managers dominated fixed-income managers overall.
But General American's mortgage fund, which took the top spot in the PIPER commingled fund universe, seemed out of place among the GIC-dominated funds.
Ron Drury, vice president, said the fund is an alternative to traditional bond funds and is characterized by low volatility in relation to interest rates.
Mr. Drury said the $80 million fund consists exclusively of commercial mortgages with no equity involvement. The duration of the fund is about 4.8 years. He said the fund has mortgages in 17 states, none in the Northeast, and loans a maximum of 75% of appraised value of the property. The average mortgage life is six years, he said.
Meanwhile, Cleveland-based Society Asset Management Inc.'s pooled GIC fund finished third among fixed-income managers overall for the quarter with 1.61%; for the year, the fund returned 6.79%.
Bruce T. Goode, vice president and chief investment officer at Society, said Society has about $12.3 billion in pooled GIC funds under management. He said the Society funds are 90% traditional insurance company GICs and about 10% cash. Only high-quality contracts from North American carriers with credit ratings of AA or higher are purchased.
"We looked well because during the fourth quarter of 1993, when you could only buy contracts at 5%, we raised cash (to 18% from 10%) and lowered the duration of the funds," he said.
Comparing GIC funds with bond funds is not totally fair, said Murray Becker, president of Becker & Rooney, a GIC consulting and management firm in Teaneck, N.J.
"The accounting mechanisms are different for bonds and for GICs. With the increase in interest rates in the first half of 1994, most assets valued at market were destroyed. But GIC funds look good under these circumstances. Stability is what makes GICs and their copycats so attractive to plan sponsors," said Mr. Becker.
Among managed accounts, low-duration, short- and intermediate-term money managers outperformed most of the 430 PIPER fixed-income managers overall.
Hotchkis and Wiley, Los Angeles, had two portfolios that performed well during the quarter and the 12 months.
The $100 million Hotchkis and Wiley low-duration portfolio finished No. 5 overall for the quarter with 1.06% and second for the 12 months at 7.82%. The $18 million intermediate-term fund portfolio finished in seventh place overall for the year at 5.1%.
Don Steinbrugge, director of marketing, said the low-duration style uses the Merrill Lynch one- to three-year bond index as its benchmark while the intermediate-term approach uses the Lehman Brothers Government/Corporate Bond Index.
He said both styles try to add value by limiting portfolio duration to plus or minus one year of the benchmark index and through yield curve and sector management. He said Hotchkis and Wiley portfolio managers execute their own trades, rather than relying on traders.
The asset mix of the low-duration portfolio is 10% government bonds, 32% corporate bonds, 48% mortgages, 10% cash. The intermediate-term portfolio has about 12% governments, 29% corporates, 56% mortgages and 3% cash.
Patricia Klink, president and chief investment officer at Advisers Capital Management Inc., New York, said she also follows a conservative fixed-income style in the two top performing PIPER separate account portfolios and adds value through moderate risk exposure and high quality. The limited-duration portfolio finished third for the quarter with 1.12% and the discretionary fixed income portfolio finished the quarter in seventh position overall with 0.80%.
She said the limited duration approach has a duration range of zero to three years, while the discretionary fixed-income portfolio has a duration range of zero to seven years. "We use the full range of the duration spectrum for each portfolio, which is usually "extremely low during the early stages of a bear market such as this,"while also looking for trends and mispricing in the fixed-income area, she said.
"We focus on total return and hold only high-quality, liquid U.S. Treasury and agency instruments," said Ms. Klink. She said less than 20% of the $2 billion under management is invested in the discretionary fixed-income and limited duration approaches at Advisers Capital.