Bond managers might not agree on the best bond for your buck, but the third quarter's best performers all made bets on short-duration strategies.
Portfolios with holdings in collateralized mortgage obligations, asset-backed securities, mortgage-backed securities, guaranteed investment contracts, senior secured floating loans, corporates and private placements topped the Pensions & Investments Performance Evaluation Report rankings for the quarter and in some cases for the one-year period ended Sept. 30.
The median returns for the overall managed and commingled fixed-income accounts were a dismal 0.8% for the quarter and 0.3% for the year. The Salomon Broad Bond index posted a 0.7% return for the third quarter and -0.3% for the year ended Sept. 30.
Eaton Vance Management, Boston, had the top-performing managed account for the quarter and year ended Sept. 30 with returns of 1.8% and 7.7%, respectively, in its senior secured floating portfolio.
Walter Shulits, director of institutional marketing, described the strategy as "junk cash," because the portfolio managers are now substituting credit risk for duration risk by investing in securities rated BB and BB-.
The returns reflect the inadequately priced and underappreciated asset class, which until recently was a closed market of banks making their loans in a vacuum, Mr. Shulits said.
In a tie for second place for the quarter were Capital Consultants Inc., Portland, Ore., and Independence Fixed Income Associates Inc., McLean, Va., both with 1.7%.
Capital Consultants' short-term strategy uses private investments ranging from commercial mortgages to asset-backed securities in addition to government and corporate bonds.
"The shorter the better in 1999, so far," said Roger Thomas, chief investment officer, of the firm's duration strategy.
Mr. Thomas also has invested in financial sector securities, which have taken a beating as of late. Nonetheless, the firm continues with its buy-and-hold philosophy in that sector.
There was a three-way tie for third place in the quarter. Reporting a return of 1.6% were Fiduciary Capital Management, Woodbury, Conn., with its FCM/GIC stable value strategy; Certus Asset Advisors, San Francisco, with its stable asset management strategy; and Morley Capital Management Inc., Lake Oswego, Ore., with its MCM blended index portfolio.
Fiduciary Capital and Certus also ranked among the top five for the one-year period, with returns of 6.7% and 6.4%, respectively.
Tied for fourth place for the quarter at 1.5% were Advantus Capital Management Inc., St. Paul, Minn.; and Kayne, Anderson Investment Management, Los Angeles.
Advantus portfolio manager Wayne Schmidt said he looks at the same fundamentals in the shorter duration part of the bond market as at the longer end.
His short-duration portfolio is now overweighted in mortgage-backed and corporate securities.
"Short duration is attractive in yield . . . 61/4% yields and higher in a low inflationary environment is particularly attractive," he said.
Close behind were Metropolitan West Asset Management, Los Angeles, with a low duration strategy; LM Capital Management Inc., San Diego; and Ward & Wissner Capital Management, Hastings on Hudson, N.Y., with its enhanced bond index strategy. All returned 1.4%.
"There's more than one way to skin a cat," said Luis Maizel, senior managing director at LM Capital of the diverse groups of bonds short-duration managers are using.
Mr. Maizel invests in emerging market debt in companies such as Ford Brazil, which is backed by Ford USA, and Mexico's Pepsi-Gemex SA in LM's opportunistic core fixed-income portfolio.
His emerging-market bets have been safe so far without defaults, although balance sheets of the holdings often can change overnight.
"Investing in emerging markets is like a minefield. If you buy good glasses with night vision, you will do very well," Mr. Maizel said.
The best managed accounts for the year ended Sept. 30, had a broader range of investments than those of the quarter, including high-yield bonds.
The remaining top performing managers for the one-year period ended Sept. 30 were UBS Brinson Inc., Chicago, and Loomis, Sayles & Co. Boston. UBS' U.S. high-yield bond portfolio returned 6.8% for the year and Loomis' medium-grade portfolio returned 6.3%.
For commingled funds, GIC managers and stable value managers were the leaders in the quarter, with the top 15 managers' returns in a tight range between 1.7% and 1.3%. GIC portfolios had dominated in the second-quarter PIPER rankings as well.
Tied for first place for the quarter were Los Angeles-based Financial Management Advisors and New York-based Deutsche Asset Management. Tied for second at 1.6% returns were: Pacific Century Trust, Honolulu, with a defensive GIC fund; American Express Financial Corp., Minneapolis, with the AMEX Trust Stable Capital fund and the AMEX Trust Income fund; and Key Asset Management, Cleveland, with its MaGIC Fund.
For the one-year period, Pacific Century was the leader at 6.6%, followed by Key Asset and American Express at 6.4%.