Rising interest rates pushed many short-duration fixed-income managers to the top of the heap in the first quarter, according to Pensions & Investments Performance Evaluation Review.
Demand for quality overseas bonds also boosted performance of managers that held international paper.
Managers with portfolios using short-duration strategies benefited from the rise in U.S. interest rates over the quarter due to fears of inflation, rising energy prices and the war in Kosovo, money managers said.
During the first quarter, interest rates moved up 57 basis points on 10-year Treasury notes.
The leading manager among PIPER's commingled fixed-income funds was Loomis, Sayles & Co. LP. Loomis ranked first for its fixed-income fund, which returned 2.94%, and second for its investment grade fund, which returned 2.91%.
Loomis' fixed-income fund returned 3.17% for the year ended March 31 and an average annual 10.46% for the three years ended March 31, putting it third from the bottom among commingled fixed-income funds in the PIPER universe for the year and third from the top for the three years. The investment-grade fund returned 3.48% and 9.49% over the same periods, putting it fourth from the bottom for the year and No. 9 for the three-year period.
Rounding out the top five were: Lipper & Co. LP's intermediate bond fund, with 2.8%; Pacific Century Trust's defensive GIC fund, with 1.61%; and Key Asset Management Inc.'s MaGIC Fund, with 1.54%.
Loomis also came out on top in composite or separate accounts, with a 2.14% return on its medium-grade bond strategy for the first quarter. It returned 3.3% and 10.06%, respectively, for one- and three-year periods. For the one-year period it was seventh from the bottom in its universe.
The other leading fixed-income managers were: Eaton Vance Management, with 1.81% in its Senior Secured Floating Fund; Fiduciary Capital Management, at 1.61% in a stable-value portfolio; Goldman Sachs Asset Management and Sit Investment Associates, both with 1.58% in their short-duration portfolios.
Managers said their portfolios were measured against a variety of benchmarks. Two commonly cited were 90-day Treasury bills, which returned 1.1% for the quarter, and the Merrill Lynch one- to three-year Treasury index, which was up 0.6% for the quarter.
The Salomon Broad Bond index returned -0.5%, 6.5% and an average annual 7.8%, respectively, over the quarter, one and three years ending March 31. The Salomon World Government Index, in U.S. dollars, returned -3.9%, 10% and 5.5% over the same periods. And the Salomon non-U.S. World Government Bond index returned -4.8%, 11.6% and 4.4% in U.S. dollars for the periods.
Loomis succeeded in the first quarter by sticking to its game plan during turbulent markets last year.
The composition of the medium-grade composite during 1999's first quarter "was not too different from the third and fourth quarter" of 1998, said Kathleen Gaffney, vice president and portfolio manager in Boston.
Investors were "risk averse" then, she said. Credit spreads widened last summer and fall after Russia defaulted on its local bonds and the hedge fund Long Term Capital Management nearly collapsed.
Loomis around that time bought Asian and Brazilian dollar denominated bonds such as Korea's Samsung Electronics and Thailand's Bangkok Bank Ltd. "when there were no bids," she said.
"The demand for yield that had disappeared snapped back" in the first quarter, she said. "The one-year number was low because of the backup in the market" last August to October.
Widening credit spreads hit "a large number of bonds trading at a discount to par," she said, affecting the portfolio's less than investment-grade and marginally investment-grade securities.
Loomis also owned securities of domestic companies that could benefit from a rise in interest rates, she said. "If the economy is strong, it's usually good news for companies who need to generate cash flow and pay down debt."
Fitting that profile were NEXTEL Communications Inc., Fruit of the Loom Inc., Venator Group Inc., Apple Computer Inc., and National Semiconductor Corp., all of which are part of the portfolio, she said.
The portfolio has a 19% exposure to such "Yankee" bonds, she said. It also has 18% in Canadian paper, and 5.8% in New Zealand and South Africa. The rest of its assets are domestic medium-grade and lower-end investment-grade bonds. It also has some domestic high-yield paper, she said.
Changing status
In contrast, the leading separate account manager over one and three years, Bridgewater Associates Inc., was hammered in the first quarter. Its extra-long duration bond account, set up for one client, lost 9.31% for the quarter while gaining 29.45% for the year ending March 31 and an average annualized 37.27% for the three-year period.
In one- to three-year periods, the portfolio has "done well because interest rates have fallen and that's a big advantage," said Robert Prince, director of research and trading for the Westport, Conn.-based Bridgewater. The portfolio also was invested in some foreign sovereign bonds hedged back to dollars, a move that "added value."
The benchmark for the portfolio is the 25-year duration bond, he said. Its return was down 12.8%. "A lot of the performance is driven by the benchmark," he said.
A number of managers of commingled funds and managed accounts pointed to their short-duration strategies as the key to returns in an environment of rising interest rates.
Sit's $50 million stable-value portfolio has a weighted average duration of 1.7 years, said Bryce Doty, vice president and portfolio manager for Minneapolis-based Sit. The company increased the weighting of government-backed, mortgage "passers" -- or bundled mortgages -- with interest rates of 9% to 11%, he said.
"When interest rates go up, fewer people refinance, so I keep the super-high coupon on the book," he said.
Short time
New York-based Lipper's commingled portfolio, with about $500 million in institutional assets, was "very short duration, " said Abe Biderman, executive vice president and managing director. The portfolio "was protected when interest rates moved," he said, adding that it also owned "some Goldman Sachs paper," which was taken out of the market at a "substantial premium" before the investment bank's initial public offering.
Massachusetts Mutual Life Insurance Co.'s short-term commingled bond fund had a duration of 1.3 years and returned 1.11% for the quarter. Because of the increase in interest rates, "the portfolio lost 65 basis points," said Ronald Desautels, managing director in Springfield, Mass. "The coupon was enough to overcome that loss.
"But competitors lost 150 basis points with three-year durations."
The $295 million commingled portfolio had one-third in Treasuries; one-third in commercial paper; and another third divided among corporate bonds, asset-backed securities and mortgage-backed securities.
Goldman Sachs Asset Management, with about $1 billion in its short-duration composite, "owned mortgages instead of Treasuries, and that was a positive," said Jonathan Beinner, a managing director.
American Express Financial Corp. benefited because its commingled portfolios were "book value wrapped" said Bob Richey, senior vice president for investment with American Express in Minneapolis. "Price fluctuations don't occur as interest rates move in markets." American Express saw returns of 1.51% and 1.49%, respectively, in its commingled trust income fund and trust stable capital fund for the quarter.
The trust income fund had exposures of 21% to insurance company GICs; 13% to short-term investments such as money market funds and floating rate instruments; and 66% in synthetic GICs.
The stable value fund was composed of all synthetic GICs, he said.
