High-yield bond managers were the big winners in fixed-income managed accounts for both the second quarter and the year ended June 30, according to the latest data from Pensions & Investments' Performance Evaluation Report.
The median high-yield bond portfolio gained 5.3% for the quarter and 16% for the year.
Long-duration bonds also made an impressive showing, with the median long-duration portfolio advancing 5% in the quarter and 9.7% for the year.
Other fixed-income approaches performed sluggishly, especially in the quarter ended June 30, with the median limited-duration, fixed-income account rising only 2.2% and the median intermediate-duration, fixed-income account gaining just 3.1% in the period.
The median fixed-income manager advanced 3.4% in the quarter and 7.9% for the year. Those results lagged the Salomon Broad Bond Index, which returned 3.6% for the quarter and 8.15% for the year, and the Lehman Government Corporate Index, which advanced 4.13% in the quarter, 8.79% for the year. All numbers are as of June 30.
For the year, Colonial Advisory Services Inc., Boston, turned in the best performance in the fixed-income managed accounts with its high-yield securities composite, which shot up 16.77% in the period.
In the quarter, NISA Investment Advisors, St. Louis, ranked first with its long-duration, fixed-income portfolios, up 8.89% for the period, followed by Western Asset Management Co., Pasadena, Calif., whose long-duration portfolio gained 7.2% That portfolio ranked third for the year among PIPER managed account fixed-income managers, up 13.99%.
Andrea Feingold, portfolio manager and senior vice president at Colonial, which ranked first among PIPER managed accounts, said she has been employing the same value investment strategy for the high-yield managed bond accounts for several years. "We focus on total return by managing risk first. We evaluate a possible downside while looking at upside potential."
The $1.5 billion account is overweighted in single B to B-plus issues from new companies and companies selling new high-yield debt.
"They have been offering an average return of 10.5% on new issues, which is far more compelling than the secondary market," said Ms. Feingold.
Before buying, her team researches the companies and their industries to be certain there is value in the issues. Around 25% of the portfolio is allocated to senior or secured debt for added protection in case some of the high-yield bonds falter.
While Ms. Feingold sees some slowing of the economy, she expects the choppiness in the equity and bond markets to continue.
Issues that she currently favors include Cablevision Systems Corp., USAir Group and Revlon Inc.
Dorothy Held, Colonial institutional portfolio manager, works on the account with Ms. Feingold.
Loomis, Sayles & Co. L.P., Boston, was second for the year; its Medium Grade portfolio rose 15.39% in the period.
"At Loomis, Sayles, the focus has been on acquiring attractively priced corporate bonds of businesses whose fundamentals are improving," said Kathleen Gaffney, vice president and portfolio manger of the Medium Grade portfolios.
Around 35% of the portfolio can be invested in below investment-grade bonds, but currently only 32% is allocated to high-yield bonds, 28% to triple Bs, 14% to single As.
"We want to be sure the price is good," said Ms. Gaffney, whose strategy is to find bonds selling at big discounts that are likely to increase in value as their companies' fundamentals improve.
Typical was Apple Computer, which she bought at $89 and sold recently at a range of $114 to $118. "When people get all excited about a company, as they did after Microsoft recently bought a stake in Apple, that's when we exit," she said.
Tele-Communications Inc. is another favorite U.S. holding. "Cable issues represent a good value right now, because the industry offers an important way of distributing information technology."
Ms. Gaffney, who works on the $97 million account with Dan Fuss, executive vice president, said they also see opportunity in Asia and are building up exposure there. Canada is attractive as well, and commands around 16% of the portfolio.
At Western Asset Management, the strategy for its long-duration managed accounts has been to overweight bonds whose durations are longer than a client's benchmark, said Ken Leech, director of portfolio management.
"Each client picks a different duration benchmark, say eight years or 12 years, and we then look for a longer duration for the account."
In the last year, the average benchmark chosen by clients using these bonds was 10 years, while the average duration for the bonds in the portfolio was 111/2 years. In comparison, the benchmark Salomon Broad Bond Index used a duration of 41/2 years, said Mr. Leech.
The portfolio, which ranked third in the PIPER fixed-income accounts and first in long duration accounts for the year, also benefited from investing 40% of assets in corporate bonds. "Corporates have been the best performing sector in the bond market, which helped us," he said.
Mr. Leech does not anticipate much inflation over the next 12 months, but said that if interest rates were to decline, he would lower the duration of bonds in the portfolios. Ed Moody, senior portfolio manager, also works on the accounts, which now stand at around $2.42 billion.
An overweighting in high-yield bonds helped push San Francisco-based GMG/Seneca Capital Management's Value Driven Fixed Income and Value Driven Core accounts into fourth and sixth place, respectively, in the one-year PIPER rankings. Portfolio manager Charles Dicke's value strategy has spurred him to accumulate high quality names in the high-yield arena, he said.
The value-driven, fixed-income account has this year allotted as much as 65% to high-yield bonds, compared with five years ago when the exposure was closer to 10%.
He avoids issues from lower quality project financings and invests only in companies that have operating histories of at least three years and strong cash flow coverage. The remainder of the portfolio is invested in mortgage-backed assets and investment-grade corporates, with a small position in Canadian hedge products.
Companies Mr. Dicke currently likes include Corporate Express and John Q. Hammons Hotels.
The value-driven core portfolio is not as risky and uses higher quality issues, said Mr. Dicke. The average holding is investment grade triple B or higher.
The team working on the portfolios under Mr. Dicke includes Janice Diamond, head of credit research, and credit analysts Maya Sarda, Umesh Patel and Joe Morgan.
In the PIPER survey of commingled bond funds, long-duration portfolios were the standouts, with the median manager advancing 8.9% for the year, 5.2% for the quarter. Next best performances came from broad market fixed-income funds. According to PIPER data, median managers of those portfolios added 3.7% in the second quarter, 8.3% for the year. The median manager in the intermediate duration fixed-income commingled funds climbed 3% in the quarter, 7.4% in the year.
Median managers of commingled funds also fell behind their benchmark indexes, gaining 3.5% for the quarter, 7.8% for the year.
Cincinnati-based Union Central Life Insurance Co.'s Carillon Bond Fund led the commingled PIPER funds for the quarter and the year, up 22.76% for the year ended June 30, 9.83% for the quarter. Lipper & Co. L.P., New York, took second place in the commingled rankings, with its Lipper Intermediate Bond Fund #1, which rose 19.48% for the year.
In the quarter, Barclays Global Investors, San Francisco, ranked second with its 20+ Treasury Bond Index Fund, which rose 5.91%.
Union Central Life Insurance Co.'s $90 million Carillon Bond Fund was boosted by its corporate bond holdings, said portfolio manager Gary Rodmaker. The portfolio has 50% of assets in corporate bonds, 5% cash, with the balance divided between mortgage-backed securities and Treasuries. The average maturity of the bonds in the portfolio was 9.8%. Companies that performed well and helped the portfolio's performance include ShopKo Stores, Time Warner Inc. and Nabisco Holdings Corp., said Mr. Rodmaker.