Active commingled bond fund managers topped the performance charts in the first quarter in Pensions & Investments' Performance Evaluation Report.
For the 12 months ended March 31, however, they fell behind managers of index funds.
Commingled fixed-income portfolios in the first quarter of this year kept somewhat apace with broad market indexes, because of a rally in interest rates. The median PIPER fixed-income commingled fund returned 1.6% in the quarter. The Salomon Broad Bond index also returned 1.6%, and the Lehman Brothers Government Corporate Bond index returned 1.5%.
The median PIPER fixed-income commingled account manager's 11.2% return in the one-year period lagged the broad market Salomon and Lehman Brothers indexes with 12% and 12.4%, respectively.
For the three-year period ended March 31, the median PIPER fixed-income manager for commingled accounts reported a return of 8.7%. The Salomon and Lehman indexes returned 9.2% for the period. (Figures for periods of more than one year are compound annualized.)
The leader in managed fixed-income accounts for the first quarter was Bridgewater Associates' Extra Long Duration Bonds with 6.41%. The median PIPER fixed-income managed account returned 1.6% in the first quarter.
The same Bridgewater fund held the No. 1 spot for managed fixed-income accounts for the one-, three- and five-year periods.
For the one-year period ended March 31, the median PIPER fixed-income managed account returned 11.5%. This fell short of the Salomon Broad Bond index, which for that period returned 12%.
This was an improvement from the three-year period ended March 31. The median PIPER fixed-income managed account returned 9% for that time period, which lagged the Salomon index showing of 9.2%.
For commingled accounts, Loomis, Sayles & Co., Boston, took the first and second spots in PIPER for the first quarter, reporting 3.6% for its fixed-income fund and 2.8% for its investment-grade fixed income fund.
The same funds also posted strong returns in other periods. Loomis' fixed-income fund ranked seventh with 16.8% and its investment-grade fixed-income fund ranked ninth with 15% for the 12 months ended March 31.
Loomis attained its lead by continuing to look for value, said Kathleen Gaffney, vice president and portfolio manager. At the lower end of the quality spectrum -- with bonds rated BBB and lower -- the spreads are still narrowing with telecommunications showing a strong performance, she said.
"With a lot of liquidity out there and rates moving lower, that's good news for bonds as a whole," Ms. Gaffney said.
The strong first quarter showing of the bond market was in part caused by a flight to quality in the short run touched off by the Asian crisis, she said. Investors feared Asia's economic troubles would wash onto U.S. shores, adversely affecting the economy and federal regulators. But this country's strong economy has offset the volatility of the foreign markets, she said.
Still, the positive interest rate environment might not last because some industries, especially the high-technology sector, might yet suffer from a soft global market, Ms. Gaffney cautioned.
"We're starting to see on the tech side some weak earnings coming through," she said. "Recently, traders are worrying that rates could go up."
Transamerica Investment Service, Los Angeles, which has consistently held a place among the top 12 managers, but in the eighth or ninth position, edged up in the first quarter to the fifth commingled spot with its Transamerica Bond Fund showing a return of 2.08%. Transamerica Portfolio Manager Susan Silbert said that the strategy of the fund has consistently been to strongly emphasize credit research over betting on interest rates.
Transamerica, an actively managed commingled fund, looks for specific companies or industries where there is a positive change, Ms. Silbert said.
"The last 12 months was a period in which we saw a number of our credit research ideas in particular industries that were undergoing consolidation -- like supermarkets -- and restructuring and deregulation -- like electric utilities," she said.
The supermarket industry was not an area where it was easy to make money. "Not all supermarket companies did well," Ms. Silbert said.
But Transamerica's fixed-income group tried to do their homework to find the better-managed companies, said Matthew Kuhns, co-portfolio manager.
With California leading the nation in the race to begin electric deregulation, Mr. Kuhns said, the group looked out for states that were more aggressive and more hostile toward bondholders.
"California is bondholder friendly," he said. "Those two industries (electric utilities and supermarkets) during the last 12 months is where we saw the pay off."
In contrast to the recent performance of some other active managers, Barclays Global Investors, San Francisco, has seen its fortunes ebb and flow with the tides of the marketplace.
In the first quarter of this year, BGI's Long Corporate Bond index was among the bottom 12 performing commingled fixed-income managers with a return of 1.3%. In comparison, its one-year return was 17.2%, ranking it fifth among the top-performing funds.
"We tend to be the middle guy in the long haul," said Mark Friebel, head of index fixed income for BGI.
Overall, the year was a very good one for fixed-income index funds. For example, index bond funds managed by BGI during the 12-month period ended March 31 took three of the top five commingled fixed-income fund slots. BGI's 20+ Treasury Bond index fund ranked first with a return of 22.4%, and its Long Government Bond index Fund ranked third with a return of 20.8% for the period.
"We were doing our job and the active guys just missed the boat," Mr. Friebel said of the 12-month returns.
The long corporate bond fund's "relatively modest return" in the first quarter was due to a stabilized U.S. economy with low unemployment and low inflation, he said. But the relatively good economy is a double-edged sword for investors because in the past a vibrant economy with low unemployment generally has led to high inflation, he said.
"The question is whether this is an anomaly or a new world," Mr. Friebel said.
But this query is being debated in the halls of more active managers, he added.
"For our portfolios, we are buying exposure," Mr. Friebel said. "We need to be apprised, but we won't change our buying habits."
At least one active portfolio manager attributed last year's strong showing of index funds to the Asian crisis catching some managers unaware. Ronald F. Stajkowski, president of Beverly Trust Co. of Oak Lawn, Ill., said he was keeping his eyes on Asia last October and November.
The Beverly Trust bond fund ranked seventh among commingled funds, returning 2.01% in the first quarter.
"This time around, it was obvious to me that Asia would cause a lot of problems as far as reducing growth," Mr. Stajkowski said. "I buy the longest security possible with no calls."
He has followed this basic strategy since the 1994 election because since then there has been a population and bias shift, he said. The United States is becoming a much more conservative country, he said.
J.P. Morgan Investment Management, New York, whose commingled tactical duration fixed-income fund ranked fourth in the quarter with 2.21% and 11th for the three-year period with a 10.9% return.
J.P. Morgan's tactical duration portfolio managers make market timing decisions using an equilibrium model, said Paul Zemsky, managing director in charge of its duration team.
"The quarter ended March 31 was not terribly volatile. Interest rates rallied, with rates ending the quarter pretty much as it started the quarter," Mr. Zemsky said.
However, the tactical duration model thrives on volatility, he added.
"When volatility is low, tactical does not add value," he said.
Instead, Mr. Zemsky attributed the fund's success to corporate bonds doing well during the first quarter.
Although the first quarter was positive, some investors held the view during that period that yield spreads had gotten too wide, said Gerry Lillis, managing director and co-head of the U.S. fixed-income group at J.P. Morgan.
At the same time, the United States' strengthening economy bolstered the value of investment-grade corporate bonds -- which were available in large supply during the first quarter -- and demand outstripped supply, he said.
"Liquidity evaporated from the market place," Mr. Lillis said. "As the first quarter played out, the view was that things were not as bad as people had perceived, but that there was attractive value."
