Fixed-income managers were able to outperform broad benchmark indexes in 1996, despite lackluster absolute returns in 1996, according to Pensions & Investments' Performance Evaluation Report.
High-yield-focused managers had a much stronger year in terms of absolute returns, PIPER data show.
The median fixed-income manager in PIPER returned 4.1% in 1996. The Salomon Brothers Broad Bond Index returned 3.6% and the Lehman Brothers Government Corporate Index returned 2.9% for the same period.
Shorter term, the median PIPER fixed-income manager returned 2.8% in the fourth quarter, and longer term, returned an annualized 7.1% for the five years ended Dec. 31. The Salomon Broad returned 3% and 7.1%, and the Lehman Government Corporate returned 3.1% and 7.2%, for the same respective periods.
The median high-yield bond manager in the PIPER database returned 14.3% in 1996, while the Salomon High Yield Index returned 11.3%.
Among all fixed-income managers, FXC Investors Corp., New York, reported the highest ranking composite return for the year with 11%.
FXC invests in publicly traded closed-end mutual funds and considers both utility funds and preferred stock funds to be fixed-income instruments.
Bellevue, Wash.-based GW Capital Inc.'s sector rotation bond strategy made it the second highest ranking fixed-income manager
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in PIPER. It reported a return of 10.2% for 1996, and was ranked fourth for the five years ended Dec. 31 with an annualized return of 11.5%.
The Boston office of Loomis, Sayles & Co. reported the third ranked PIPER separate account composite for the year, with 9.7% in its medium grade fixed-income strategy. The strategy ranked high in other periods as well. For the quarter, it ranked fifth in PIPER with 5.2%; for the three years it finished first with an annualized 11.1%; and for the five years it ranked No. 1 with an annualized 12.4%.
Looking back at 1996, "it was a liquidity-driven market, " said Kathleen Gaffney, vice president and assistant portfolio manager for Loomis.
Investors were seeking yield and willing to give up some creditworthiness to get it, Ms. Gaffney said.
Loomis' managers try to find corporate bonds with improving fundamentals and a yield still adequately high.
Loomis managers complemented U.S. holdings with Yankee bonds (non-U.S.-issued securities that pay in U.S. dollars), Canadian debt and emerging market debt. (The strategy cannot invest more than 20% outside of the United States and Canada).
"We saw a lot of value in Canada," Ms. Gaffney said. Not only did yield spreads narrow in the securities, but the Canadian dollar rose relative to the U.S. dollar, she said.
In another non-U.S. issue, Loomis managers recently swapped Argentine Brady bonds for Argentine sovereign debt, picking up 250 basis points in yield, she said.
GMG/Seneca Capital Management, San Francisco, reported the fourth highest return for 1996, 9.1% for its value driven strategy. The same strategy was fourth in the three-year period and seventh in the five years with respective annualized returns of 8.8% and 10.4%.
GMG/Seneca's managers look wherever they can for fixed-income securities with good risk/reward profiles, said Charles Dicke, taxable fixed-income manager.
The main reason behind GMG/Seneca's outperformance in 1996 was some high-yield positions that benefited from a shrinking yield premium, he said.
Currently, GMG/Seneca's portfolio managers are working on upgrading the quality of the portfolios and taking some of the profits from those lower-rated securities, he said.
The portfolio's duration was shorter than its benchmark, which also helped relative performance.
Like Loomis' Boston managers, GMG/Seneca gained by investing in Canada, picking up extra yield, as well as a gain from currencies.
Bell Capital Management's managed bond strategy was ranked fifth for the year with 9.1%. The strategy for Atlanta-based Bell also performed well for the long term, finishing third for the five years with an annualized 11.7%.
AnalyticTSA Global Asset Management Inc., Los Angeles, reported the sixth-ranking strategy for 1996 with a return of 7.9% in its fixed-income plus strategy.
For separate accounts, the strategy uses a core fixed-income index portfolio that can range from 50% to 100% of the portSee Bonds on page P16Continued from page P13
folio depending on AnalyticTSA's view of the markets. The balance of the portfolio is used to invest in options positions that AnalyticTSA takes on to create fixed-income characteristics but with a higher return.
Using its proprietary models and forecasts for options volatility, AnalyticTSA will take long and short positions in mainly equity options that are viewed to be mispriced, fully collateralizing those positions with either cash or the underlying equity shares, said Robert Bannon, managing director.
Long equity returns do show up in the strategy's overall returns, although it is structured to behave like a fixed-income investment, Mr. Bannon said.
The options volatility management focuses on stock options mainly because that's where most mispricing occurs, he said. The firm used to use fixed-income options but recently started using yield curve options on a limited basis in the strategy, Mr. Bannon said.
The strategy doesn't involve intraday trading of options; usually option positions are held to expiration, he said.
Another Loomis strategy, sector rotation run by its San Francisco office, ranked in the top 10 fixed-income managers in 1996, finishing seventh with 7.7%. In addition, the strategy ranked eighth among PIPER managers for the five years with an annualized 10.3%.
Rahim Manji, senior partner in fixed income for Loomis, said that despite a strong performance by bonds in the fourth quarter, "the year itself was unsatisfactory."
Loomis' strategy rode higher on rising bond ratings in bonds in the airline sector, among broker/dealers, and with an issue by RJR Nabisco Inc., Mr. Manji said.
In mortgage-backed securities, issues selling at a premium to par value did well in the first three quarters, while discounts outperformed in the fourth quarter, he said.
Looking ahead, Loomis managers are inclined to take some of their profits in the corporate sector.
"Spreads in corporates are extremely narrow," Mr. Manji said, referring to the yield spread between corporate bonds and U.S. Treasury securities.
"It's difficult to predict when they'll widen, but at such a narrow spread, there's no margin for error," Mr. Manji said.
Trust Co. of the West, Los Angeles, Wagstaff & Associates, Salt Lake City, and Pacific Income Advisers, Santa Monica, Calif., rounded out the top 10 fixed-income managers.
Each firm posted a return of 7%.
High-yield managers had a terrific year, buoyed by increased cash moving into the market at a time when issuance also was growing.
Yield spreads narrowed significantly in 1996, said Nelson R. Jantzen, senior vice president and head of the high-yield group at Alliance Capital Management L.P., New York.
Alliance's high-yield composite was the top ranked high-yield PIPER separate account manager in the year, with 21.6%.
Tremendous technical factors worked in the overall high-yield market's favor, with more cash than product, he said.
Alliance, with about $3 billion to invest in high yield, benefited through a number of ways during the year, according to Mr. Jantzen.
"It was just one of those years where everything went right," he said. He said they were part of a wave of assets moving into high yield.
But the question is whether spreads will continue to narrow in 1997, he said.
Alliance managers expect prices to remain fairly steady for the rest of the year but are more concerned about 18 months down the road, when some of the bond issuance from 1996 starts to hit a wall, he said.
Nomura Corporate Research & Asset Management Inc., New York, reported the second highest return for high-yield managers in 1996 with 20.8%.
The third ranked high-yield composite is run by MacKay-Shields Financial Corp., New York, with a return of 20.2%.
Steven A. Tananbaum, managing director for MacKay, said the firm's strategy gained from its philosophy of "good things happen to good companies."
Different issues they owned rose after big events at the company, such as buy-outs, recapitalizations and initial public offerings of stock.
Looking ahead, he said they're "very cautious," with yield spreads so tight.
He said investors are not getting compensated for the risk they're taking.
The fourth-ranked composite is managed by Fidelity Investments, with a return of 15.4% for its high-yield bond pool. (Fidelity also ranked eighth with a return of 15% for its separate account composite).
Thomas Soviero, portfolio manager in Fidelity's high-income group in Boston, said Fidelity's tendency to concentrate on B rated issues contributed to its return in the year.
According to one index, B rated issues tightened by 179 basis points in 1996, while BB issues tightened by 91 basis points.
Mr. Soviero doesn't expect 1997 to produce the strong returns seen from high yields in 1996, in part because yields have tightened so much.
In addition, Mr. Soviero said it was a good year for a bond picker, which Fidelity is, using bottom-up research.
The fifth-ranked high-yield manager in 1996 was Miller Anderson & Sherrerd. The West Conshohocken, Pa., company's high-yield composite returned 15.4% for the year.
Putnam Investments, Boston, posted the sixth highest return with its high-yield management trust, posting 15.3%. Another Putnam high-yield composite ranked ninth with a return of 14.8%.
Edward D'Alelio, chief investment officer for Putnam's high-yield group, said Putnam benefited from issues in the aerospace sector, movie company sector and from some emerging market securities that were payable in U.S. dollars.
Mr. D'Alelio said Putnam was able to avoid some of the blowups that occurred in companies with declining fundamentals.
Looking ahead, Putnam managers are focusing on good quality companies in the sector, and Mr. D'Alelio said a return of 10% to 12% from high yield wouldn't be unreasonable.
Chancellor Capital Management Inc., New York, reported the seventh ranked high-yield composite for 1996, with 15.2%.
Dan Baldwin, managing director, said the portfolios earned added return from a concentration in cyclical companies early in the year.
Chancellor's overall strategy of focusing on B rated-type of credits also matched up well with the market's performance, Mr. Baldwin said.
For 1997, Chancellor's managers are a little more on the defensive side. They are moving away from cyclical companies and looking more at sectors such as consumer non-durables, health care and textiles.
PIPER data are compiled by RogersCasey, Darien, Conn. n