International and global fixed-income managers had a rough year on an absolute basis in 1997, according to the median returns in the Pensions & Investments Performance Evaluation Report.
The median international bond manager in PIPER reported a return of -1.9% in 1997, while the median global bond manager reported a return of 2.2%. (PIPER groups separate account and commingled fund returns for international and global fixed income).
Performances of international and global bond indexes were no better. The Salomon non-U.S. World Government bond index returned -4.3% in 1997, while the J.P. Morgan Non-U.S. Government bond index returned -3.8%.
For global managers, the Salomon World Government bond index returned 0.3% in 1997, while the J.P. Morgan Global Bond index returned 1.4%.
Many of the managers that did well in 1997 used currency hedging strategies to counter the strength of the U.S. dollar.
Grantham, Mayo, Van Otterloo & Co. LLC, Boston, was first with 16.2% for its international bond composite. William Nemerever, managing director, said currency rates played a big role in returns: "The dollar was very strong."
Grantham Mayo uses a systematic process to create portfolios, and treats its currency and bond market positions as separate decisions, Mr. Nemerever said. "We made some good currency calls -- we got the dollar right and the yen."
Grantham Mayo managers will use currency forwards and options, and bond futures to change exposures, which can be cheaper and quicker than the cash markets.
The composite also ranked highly in the other periods, finishing fourth in the quarter with 2.7%, and first over three years with 22.8%. (All returns for periods greater than one year are annualized.)
The Salomon Non-U.S. World Government returned -1.4% in the quarter, 6% for three years, and 7.8% for five years. The J.P. Morgan Non-U.S. Government Bond Index returned -0.9% in the quarter, 7.1% for three years, and 8.1% for five years.
Standish, Ayer & Wood Inc., Boston, ranked second in 1997 with 12.4% for its international bond composite. Standish Ayer executives could not be reached.
PanAgora Asset Management Inc., Boston, ranked third in 1997 among international bond managers with 11.8% for its international fixed-income composite.
"We were hedged," said Roland Lochoff, senior manager, fixed-income investments for PanAgora. "The currency tail can wag the dog," and that's what happened in 1997, he said.
"The volatility of currencies is much higher than the volatility of interest rates," which is why PanAgora managers start their portfolios from a fully hedged position, he said. If they deem it appropriate, they will unwind currency hedges to specific exposures, he said.
Moreover, 1997 was not an easy year in terms of finding one big currency bet and making it pay off, he said. PanAgora's portfolios gained from the increased probability that the euro will be adopted in Europe, and from its avoidance of Japanese securities.
Prudential Global Advisors, Short Hills, N.J., tied itself for fourth for the year, with its commingled and separate account composite for its currency hedge accounts. Pru Trust Currency Hedged and its currency hedged separate account composite both returned 11.7% in 1997.
Rogge Global Partners, London, ranked fifth for the year with a 11.3% return for its international fixed fully hedged composite.
John Graham, director, said Rogge's managers continue to believe the world is returning to a much lower inflation rate. For most of 1997, they were rewarded for that view.
Managers swam against the current a bit with their favorable outlook for longer term U.S. bonds, in global portfolios, he said. For international mandates, they substituted U.S. bond positions with Canadian bonds, which ended up doing better than their U.S. counterparts for part of the year.
