Core-plus, long-duration bonds headline strong performances
Core-plus and long-duration bond portfolios had strong performance during the third quarter as fixed-income funds easily beat the dismal returns of the equities markets, according to the Pensions & Investments Performance Evaluation Report.
The decision of the Federal Reserve Board not to raise interest rates amid signs of a slowing economy and falling stock market helped enhance the returns of bond portfolios.
McKee Investment Management's core enhanced portfolio came in first for the quarter among managed fixed-income accounts with a 5.6% return. The strategy ranked 14th for the three-year period ended Sept. 30, with a compound annualized return of 7.1%. In the broad market account universe, San Francisco-based McKee's strategy was first for the quarter, eighth for the 12 months with 8.5%, and seventh for three years. Barry P. Julien, president of the firm, said "traditional fixed-income makes up 90% of the portfolio." The fund gets its enhancement from investing in "bond substitutes; electric utility stocks, which are bond-like," said Mr. Julien. He added that utilities also benefited from "the flight to safety as equities tumbled" during the quarter.
The median return for PIPER managed fixed-income accounts for the third quarter was 2.9%, easily beating the Standard & Poor's 500 stock index, which was down 1% for the quarter. For the 12-month period the median managed fixed-income return was 6.7% and for the three years, 5.9%. The Salomon Broad Bond index was up 1.7% for the third quarter, 4.5% for the year and 5.9% for three years. (All figures for periods of more than one year are compound annualized.)
Fleet Investment Advisor's Fleet Fixed-Income portfolio, with a 4.6% return, was second for the quarter among all fixed-income funds and first for the three months among long-duration bond portfolios. The portfolio was seventh overall for the one-year period with a 9.4% return and fifth for the year among long-duration bond portfolios.
Glenn Migliozzi, managing director in charge of fixed-income investments at Boston-based Fleet, said the portfolio includes a "broad spectrum" of investments including Treasuries, agency bonds, sov-reigns and corporates.
The inverted yield curve that affected bond portfolios earlier in the year changed as interest rates came down and Fleet "took it as an opportunity to sell 30-year Treasuries and buy 10-year strips and corporates and agency bonds," said Mr. Migliozzi.
Third for the quarter with a return just below 4.6% was Bridgewater Associates Inc.'s extra long duration bond portfolio. The strategy was fifth for the 12 months, and first for the three- and five-year periods with returns of 10%, 15% and 21.2%, respectively. Among long-duration accounts, the portfolio was second for the quarter, third for the year and first for the five years. Bridgewater's core-plus portfolio was fifth in the overall fixed-income universe for the three-year period with an 8.1% return and second for the five-year period with 11.2%.
"The extra long duration fund has a systemic bias to do well during interest rate declines," said Ray Dalio, president and chief investment officer of Westport, Conn.-based Bridgewater. "Our duration boundaries are not as tight and we can move the investments around more."
For the core plus portfolio, Bridgewater can invest up to 10% of the fund in emerging markets bonds. "We have the ability to add value in the global bond market," said Mr. Dalio. However, "in the third quarter we didn't have any very large bets. The (fixed-income) market went from a market that was cheap to a market that was appropriately priced."
NISA Investment Advisors' long-duration fixed-income portfolio was seventh for the quarter, second for the year, fourth for three years and third for the five-year period, with returns of 3.9%, 11.5%, 9.4%, and 9.3%, respectively.
"We have been successful in owning the right long-duration securities," said Jess B. Yawitz, chief investment officer of St. Louis-based NISA. "Sector selection and security selection within each sector" led to the strong performance, he said.
Among commingled funds, Amarillo National Bank, Amarillo, Texas, came in first for the third quarter with a 3.8% return for its employee benefits intermediate bond fund. For the full year and three-year period, however, the fund was in the bottom 12 in performance, with returns of 5.3% and 5.1%, respectively.
George Cason, senior vice president and portfolio manager at Amarillo, said the strong return in the third quarter could be due to "recovery in some of the spreads of products we have." He added that the fund's returns have been hurt for the longer periods "because we were underexposed to Treasuries."
Second National Bank's employee benefit fixed-income fund came in second for the quarter with a 3.6% return and third for the three-year period with a 7.56% return
Robert Fenwick, senior investment officer with the Warren, Ohio-based bank, said the fund uses all types of fixed-income investments, including governments, agencies, corporates and some preferred stock and convertible debentures. One of the things that boosted performance in the third quarter was that Alza Corp. called in its convertible debentures and the Second National Bank fund made $500,000 on the transaction.
"We're looking for yield. We use all kinds of things at any given point in time," said Mr. Fenwick.
Northern Trust Global Investments' NTQA intermediate corporate bond fund - an index fund - and its NTQA BondPlus fund tied for third in the third quarter with returns of 3.5%. The NTQA long-term government bond fund was third for the one-year period with a return of 9.7%. That same fund was third for the three-year period with a return of 7.4%.
Chicago-based Northern Trust's BondPlus fund performed well, according to Steven Schafer, portfolio manager, because of its exposure to high-quality commercial mortgages and high-quality residential mortgage securities.
Barclays Global Investors, San Francisco, took first and second place among commingled fixed-income funds for the one-year period. Barclays' 20+ Treasury bond index fund was first with a 10.3% return, and its long government bond index fund was second with a 9.8% return. The 20+ fund was first for the three-year period and fourth for the five-year period with returns of 7.6% and 7.7%, respectively.
The long government index fund was fourth for the three years and sixth for the five years, with returns of 7.4% and 7.5%, respectively.
"The portion of the bond markets these index funds track did extremely well," said Vache Mahseredjian, head of the bond index fund portfolio management group.