The sharp decline in interest rates coupled with a slowing economy and reduced inflationary pressures provided the platform for long-term bond managers to dominate the second-quarter Pensions & Investments' Performance Evaluation Report results.
Long-term bond managers dominated the top 10 performing overall PIPER fixed-income managers in the commingled and managed account universes.
Fixed-income managers expect interest rates to drop further in coming months and for inflation to remain in check. That, coupled with slow economic growth and monetary restraint by the Federal Reserve, should help keep the bond rally, which started early this year, on track.
Long-term bond managers breathed a sigh of relief as total returns reached double digits for the quarter and for the first half of 1995, after the dismal market for bonds in 1994.
The median PIPER commingled fixed-income manager returned 5.6% in the second quarter, 11.6% for the year ended June 30, 7.3% for the three-year period, and 9.3% for five years. (All figures for periods of more than a year are compound annualized). The median PIPER managed account returned 5.5% for the quarter, 11.2% for year ended June 30, 7.5% for the three years, and 9.5% for five years. In comparison, the Lehman Brothers Long Term Bond Index was up 10.4% for the quarter and 17.7% for the six months ended June 30. That compares with a -7.1% return for long-term bonds in calendar 1994.
The Federal Reserve Open Market Committee's decision Aug. 22 to leave short-term interest rates unchanged may be short-lived, as most fixed-income managers expect interest rates to decline in coming months. Some predict rates will drop below the 5.75% yield on the 30-year Treasury Bond reached in October 1993.
Tim Policinski, portfolio manager for the $50 million long bond account SA 25 at Lincoln National Life Insurance Co., Fort Wayne, Ind., said the fund is "designed to do very well when interest rates go down" and that long bonds should continue to do well in the current environment.
"We expect the long bond to do well and that the fund will continue to perform well in this market....We expect to see some improvement in the level of interest rates from here. We look for rates to continue downward for the rest of this year," he said.
The Lincoln portfolio finished in the top position overall among PIPER commingled accounts for the second quarter with a 14.9% return. The Lincoln fund also finished in the top spot overall among PIPER commingled fixed-income managers for the one-, three- and five-year periods with returns of 23.09%, 13.39% and 13.63%, respectively.
For the quarter, Lincoln was followed by ANB Investment Management & Trust Co., whose long-term government bond index fund returned 10.98%. The ANB long-term government bond fund finished in the fifth position overall among PIPER commingled funds for the year ended June 30 with a return of 19.57%.
NBD Bank, Detroit, finished second for the year with a 22.43% return on its Woodward Bond Fund. Lipper & Co., New York, finished second overall among PIPER commingled funds for the three years with a return of 11.93% in its intermediate bond portfolio.
The Mellon Capital Management, San Francisco, bond performance fund finished fourth overall among PIPER commingled managers for the one- and five-year periods with returns of 19.82% and 12.12%, respectively. The Mellon fund third for the three-year period with 11.6%.
Van Hoisington, president and chief investment officer at Hoisington Investment Management Co., Austin, Texas, whose fixed-income fund finished the quarter fourth overall among managed PIPER accounts with a return of 13.84%, said his firm has been committed to long-term bonds since 1990 but was nearly all cash between March 1987 and September 1990.
The Hoisington portfolio also finished fourth for the year ended June 30 with a return of 22.39%, sixth overall for the three-year period with 12.15% and third for the 10 years with 12.99%.
"The last three years, on balance, have been good (for long bonds)," said Mr. Hoisington. "I key my decisions on what the U.S. economy is doing to the inflation rate. If the economy is expanding and prices are going up its not a good time to own 30-year bonds."
He said the portfolio is 10% to 20% invested in 30-year zero-coupon bonds and the balance in 30-year government bonds.
"I am expecting a continued period of subpar economic growth .... and we expect the inflation rate to continue to decline over the next four to six quarters and that is good for the long end of the market," he said.
For the second quarter, the Bridgewater Group, Wilton, Conn., finished in the top spot overall among managed PIPER accounts with a return of 19.41% in its extra-long-duration bond portfolio. The firm finished third for the year with a return of 23.87%.
Bridgewater was followed by The Lara Group, Vienna, Va., which earned 18.17% for the quarter in its U.S. Treasury bond portfolio and ABB Investment Management Co., Stamford, Conn., with 14.88% in its long-duration government bond portfolio.
For the 12 months ended June 30, Lara Group topped the PIPER managed account universe with a return of 29.9%, followed by ABB with 25.83%.
Anders Ekernas, chief investment officer at ABB, said the $90 million long-duration government portfolio remains "aggressively long term" oriented and expects to maintain a duration of 40% more than the Lehman index.