Long-duration managers were the best performing separate account fixed-income managers in 1997, according to Pensions & Investments Performance Evaluation Report. Long-duration separate account composites took eight of the top 10 slots in PIPER.
The leading commingled funds in 1997 were more diverse, although long-duration styles were the most common in the top 10.
High-yield separate account and commingled fund managers also reported strong performance.
Fixed-income portfolios in general did well in 1997 because of falling interest rates. The median PIPER fixed-income separate account manager and the median PIPER commingled fund both returned 9.1% in 1997, which lagged broad market indexes. The Salomon Broad Bond index returned 9.6% in 1997, and the Lehman Brothers Government Corporate Bond index returned 9.8%.
Likewise, in the fourth quarter of 1997, the median PIPER manager separate account fixed-income manager and the median PIPER commingled fund both returned 2.5%. The Salomon Broad returned 3% in the quarter, while the Lehman Government Corporate Bond returned 3.2%.
For the three-year period ended Dec. 31, the median PIPER separate account manager reported a return of 10.8%, while the median PIPER commingled fund return was 9.8%. The Salomon Broad Bond and Lehman indexes each returned 10.4% for the period. (All returns for periods longer than one year are annualized).
The top performing fixed-income separate account manager in PIPER, excluding high-yield composites, was Wilton, Conn.-based Bridgewater Associates, which reported a return of 35.1% for its extra-long-duration bonds composite. The rankings do not include high-yield composites, which PIPER ranks separately.
The same composite also posted strong returns in other periods, ranking first in the fourth quarter, for three years and for five years, with respective returns of 12.6%, 34.7%, and 18.7%.
Bridgewater's extra-long-duration strategy is designed to allow investors to minimize bond market exposure and maximize equity exposure.
Bridgewater's managers also will adjust the duration as they see fit, said Robert Prince, director of research.
"It's a semipermanent exposure to long-duration bonds," he said.
Despite the strong performance of long-duration managers relative to managers in other fixed-income classes, long-duration managers still lagged some long-term bond benchmarks.
The median long-duration separate account manager reported a 12.5% return in 1997, 3.7% in the fourth quarter, 13.1% over three years and 9.8% over five years. The Salomon Long Term High Grade index returned 13% in 1997, 4.6% in the fourth quarter, 13.4% for three years ended Dec. 31, and 9.2% over five years.
The Lehman Brothers Government Corporate Long Term Bond Index returned 14.5% in 1997, 5.8% in the fourth quarter, 14.2% over three years, and 10% over five years.
The second-ranked separate account fixed-income composite for 1997 is Western Asset Management's long-duration strategy, which reported a return of 20.5%.
Western Asset managers could not be reached for comment.
ABB Investment Management Corp., Stamford, Conn., manages the third-ranked PIPER fixed-income composite return for 1997, reporting a 19.5% return for long-duration government accounts.
ABB was bullish on the bond market and still is looking into 1998, said Radha Lai, fixed-income analyst for ABB.
"For the most part, we have been long" relative to the duration of the benchmarks, she said.
When ABB managers are expecting rates to fall, they have to use U.S. Treasury stripped securities to get the duration they are looking for, she said. A stripped Treasury is a security that is heavily discounted, and pays interest and principal at maturity only, so the securities are highly sensitive to interest rate changes.
ABB managers only invest through the cash market to adjust their duration, she said.
Ms. Lai said one of the biggest contributors to the expected strength for 1998 stems from the continued effects of Asia's financial crisis, which will help keep inflation down in the United States.
Fourth-ranked among all PIPER separate account fixed-income managers was Hoisington Investment Management Co., Austin, Texas, which uses an all-or-nothing approach to bond management. Hoisington's composite returned 19.2% in 1997.
Van Hoisington, president, said the firm's portfolios are invested either completely in long-term U.S. Treasury securities or in cash, depending on the firm's view of inflation and risk. Hoisington continues to be invested in long duration Treasuries, with 20% in zero-coupon securities.
"We still (think) the rate of inflation is on a downward trajectory," Mr. Hoisington said.
UBS Asset Management (N.Y.) Inc., New York, ranked fifth among PIPER separate account managers in the year, with a return of 16.2% for its long maturity fixed composite.
Ranji Nagaswami, head of fixed income, said UBS' positions in corporate bonds gave its portfolios a big boost. UBS portfolios went from heavily underweighted in corporate bonds, because of tight yield spreads relative to Treasuries, to a close to neutral weighting as of last month.
As spreads widened, the UBS managers added to their corporate holdings, she said, adding that they had avoided finance company issues, which were hurt by the Asian turmoil.
On the commingled fund side, the top-ranked PIPER fixed-income fund in 1997 was the 17.8% return of Lexington Trust, which is managed by The Clinton Group, New York.
The trust's portfolio managers seek out arbitrage opportunities in the mortgage-backed securities market, hedging interest rate risk with swaps and options, said Patrick O'Meara, director of client services for Clinton.
The fund was ranked fourth in the quarter with a return of 4.3%, and first over three years and five years, with respective returns of 19.9% and 21.3%.
Index funds managed by Barclays Global Investors, San Francisco, took three of the top 10 commingled slots in 1997.
BGI's 20+ Treasury Bond Index Fund ranked second with a return of 16.2%, its Long Government Bond Index Fund A ranked third with a return of 15.2%, and its Long Corporate Bond Index Fund ranked sixth, with a return of 13.2%.
For the quarter, the three funds swept the top three spots, with respective returns of 7.2%, 6.5%, and 4.5%.
Jim Creighton, chief investment officer of global index investments for BGI, said falling interest rates will lead to strong performance for long-term investments like those index funds.
He said other index funds might not have appeared in the PIPER rankings because other managers might not offer as many long-term bond index funds.
Lipper & Co. LP, New York, ranked fourth in 1997 with its intermediate bond fund #1, which returned 14.5%. Lipper executives could not be reached.
The fifth ranked fund for 1997 is managed by Loomis, Sayles & Co., Boston. Its fixed-income fund returned 13.4% during the year.
Kathleen Gaffney, vice president and portfolio manager for Loomis, said the commingled fund is managed with a strategy of finding value wherever managers can find it, taking a long-term view.
While they typically like to be fully invested in corporates, managers will invest in non-U.S. sovereign debt on occasion, she said. In 1997, portfolios held some Canadian government and provincial bonds that performed well.
Loomis managers expect additional returns from their Canadian holdings through a recovery in Canada's currency relative to the U.S. dollar, she said.
PIPER data are compiled by RogersCasey & Associates, Darien, Conn. Managers' reported holdings are subject to change prior to publication.