Managers with adjustable-rate mortgages and other short-term duration investments in their portfolios were the top fixed-income performers for the first quarter, according to data from Pensions & Investments' Performance Evaluation Report.
The median manager in the PIPER managed account fixed-income universe was down 0.1% in the quarter ended March 31. That was a little better than the Salomon Broad Bond Index, at 0.5%, and the Lehman Government Corporate Bond Index, returning
-0.9%.
Returns for the 12-month period ended March 31 were more positive. The median PIPER managed account fixed-income manager was up 5.2% for the 12 months, compared with the Salomon Broad's 4.9% return and the Lehman Government Corporate's 4.5% gain.
For the five-year numbers, the median account matched the index returns, at 7.3%.
(All figures for periods of more than one year are annualized.)
For the quarter, the top overall manager in the separate account universe was Dana Investment Advisors, Brookfield, Wis., whose Short Duration portfolio was up 1.8%. Dana also had the third-ranked account for the quarter; its Short/Intermediate portfolio returned 1.6%.
Chairman Mike Dana said the increase in interest rates actually helped Dana's strategy.
"People who hire us don't want to roll the dice," he said. "Over a long period of time, yield is all that counts. Dana will do verywell in an increased interest rate environment."
Dana's Short Duration account is a mix of adjustable-rate mortgages and adjustable-rate Small Business Administration pools. Although they have slightly higher coupon rates, both securities are relatively stable in price and performed well in the first quarter, said Joe Veranth, senior vice president.
"Anytime you have a bad environment for bonds, we do very well," Mr. Veranth said. "These types of bonds, with their adjustable-rate nature, all bode well."
Dana's Short/Intermediate account holds the adjustable-rate bonds plus a small portion of fixed-rate instruments, including Treasury securities.
Dana uses a team approach to all of its investment strategies. Messrs. Dana, Veranth and Anderson are joined by Jim Ivey, chief operating officer and chief investment officer.
Certus Asset Advisors, San Francisco, ranked second for the quarter with its stable value fund, up 1.7%. Certus officials declined to comment because they believe the fund doesn't qualify as a strict fixed-income account.
The enhanced cash/short duration account managed by Salomon Brothers Asset Management, New York, ranked fourth with 1.4%. Part of Salomon's strategy is to use short-duration adjustable-rate mortgage securities.
"Clearly, with the bond market's difficulties in the first quarter, I thought it made sense to play it conservatively," said David Torchia, senior portfolio manager and director at Salomon.
Mr. Torchia said the strategy invests mainly in ARMs issued by the Federal Home Loan Mortgage Corp. and the Federal National Mortgage Association because of their short duration. The portfolio steered away from Government National Mortgage Association ARMs because those have a longer duration, he said.
The enhanced cash/short duration account is managed by Mr. Torchia and his "supporting cast": Angela Sheen, vice president and portfolio manager, and Roger Lavan, director and portfolio manager.
Mr. Torchia expects to see an economic slowdown this year and for yields to end up a little lower than expected. He did say the Federal Reserve Board most likely will increase rates this year, but that won't have a negative effect on the fixed-income market.
"This may be the year when bonds stay in the narrow range. The type of strategy we run . . . will do relatively well," he said.
The sector rotation portfolio managed by Loomis, Sayles & Co.'s San Francisco office, ranked fifth for the first quarter with 1.3%. It also finished sixth for the year with 8.9% and ninth for the five-year period with 10.3%.
Rahim Manji, senior partner in fixed income for Loomis' San Francisco office, said: "The bond market has behaved in a manner that one would expect it to. Interest rates have gone up, and right now, there are signs of a slowdown."
In the fourth quarter of 1996, Loomis rode rising bond ratings in bonds in the airline sector and broker/dealers. But during the first three months of this year, the firm lightened up in both sectors, Mr. Manji said, and moved assets to the mortgage-backed sector, including Fannie Maes and Freddie Macs.
Meanwhile, managers with impressive 12-month returns had a variety of strategies. Bridgewater Associates Inc., Wilton, Conn., topped off the list with its extra long duration bonds strategy, up 19.2% for the year ended March 31. The strategy also finished first for the five-year period at 13.2%.
While the strategy worked in the longer term, it took quite a hit in the first quarter, returning -15%, the largest loss in the overall managed account PIPER fixed-income universe.
Bob Prince, Bridgewater's director of research and trading, said first-quarter returns were hurt because interest rates were up and the long duration of the portfolio brought returns down. The account targets long-term returns and doesn't focus on short-term volatility.
Even so, Mr. Prince attributed most of the 12-month success to the portfolio's built-in flexibility.
"We can move opportunistically to foreign markets and hold all parts of the yield curve," Mr. Prince said, adding investments can range extensively along a 40-year duration band.
"We can take it down to zero or up to 40 and can do it in any country in the world," he said.
In the 12 months, the portfolio cut back its duration in domestic bonds and extended its duration band to 35 years in European bonds.
"There was a huge interest decline in Europe and we benefited from it," Mr. Prince said.
Most of its European bond concentration is in government bonds from Italy, France and Germany.
Bridgewater uses a systematic approach that is fundamental and quantitative. It also uses a team approach to manage its assets. Others involved with this portfolio are: Ray Dalio, chief investment officer; Dan Bernstein, research director; and Bridgewater's 12 researchers.
Meanwhile, the medium-grade strategy managed by the Boston office of Loomis Sayles ranked second for the 12-month period, reporting 10.7%.
The strategy ranked high in other periods as well. The Loomis composite ranked first for three years, with a return of 12%; second for five years, at 11.9%; and second for 10 years, with 11.1%.
Kathleen Gaffney, vice president and portfolio manager at Loomis' Boston office, said the focus of the medium-grade account is on the long term. It is opportunistic and identifies the best potential returns and best values in all sectors.
"We identify credits where we see good, strong fundamentals," Ms. Gaffney said, adding emphasis is also put on high yields. The average holding period is about two years and the quality of the overall portfolio is investment grade.
This account looks for markets where inefficiencies exist, Ms. Gaffney said, pointing out the managers purchased Digital Equipment Corp. in 1995, sold it in 1996, and recently repurchased. Loomis' equity analyst helped in analyzing the company for the recent buy, noting Digital's solid balance sheet.
Another buy that has done well for the account is Canadian Brady bonds. Spreads were wide and people were worried about the politics and budget deficit, Ms. Gaffney said. Loomis determined Canada had a good chance at paying down its debt and the strategy could capitalize on the spread narrowing. It had a good story, she said, and Loomis was willing to take a long-term look to capitalize on the upside.
Loomis also did well with National Semiconductor Corp., Santa Clara, Calif., The company, which develops and sells electronic products, produced too many computer chips for its inventory. Despite this concern, the company is high quality and had a lot of cash, Ms. Gaffney said.
Loomis' Boston office also uses a team approach for the medium grade account.
