Bond managers maintained their dominance over equity managers for the third straight quarter in Pensions & Investments' Performance Evaluation Report for periods ended March 31.
The 3.1% median PIPER bond return for managed accounts in the first quarter far exceeded equity managers' -10.1% median return. The difference was even greater for the year ended March 31: Equity managers wallowed in misery with the median PIPER return at -14.1%, while the median bond manager was basking in a sunny 12.2% return.
The median fixed-income return of 6.9% for the three years ended March 31 also beat that of managed equity accounts' 4.5%. But equity managers showed performance dominance in the five-year period, with a median managed account return of 14.1%, compared with 7.4% for bond managers. (All returns for periods of more than one year are compound annualized.)
Long-duration specialists with an emphasis on quality securities were most rewarded in the year ended March 31, with a median PIPER return of 13.2% for managed accounts. The quality rating of securities owned by portfolio managers was one of the differentiating factors for returns between long-duration and other fixed-income managers, said observers. Managers that concentrate on higher quality bonds ranked well in both the overall PIPER fixed-income ranking and among peer long-duration managers.
"All long-duration managers did well over the last five years. Long-duration strategies like ours are very interest-rate dependent and rates really favored long bonds," said Jess B. Yawitz, chief executive officer and chief investment officer of NISA Investment Advisors LLC, St. Louis, whose long-duration fixed-income strategy ranked eighth for the three-year period and second over five years within the PIPER managed fixed-income account universe.
"Three factors helped NISA: One, being long was your friend. Two, high quality was your friend. And three, at the margins, if your business is buying cheap crumbs you want to sell rich, you have to buy them in one-eighth and one-quarter points, rather than making big credit bets," he said.
Quality key
A major contributor to the longer-term performance of the NISA strategy was that the portfolio managers owned higher quality securities than the rest of universe typically did during the three- and five-year periods, said Mr. Yawitz.
Core and core-plus fixed-income managers also ranked prominently within the PIPER universe of bond managers for all time periods. The median PIPER managed account return for broad-market bond managers was 12.5% for the year ended March 31, slightly trailing the 12.6% return of the Salomon Broad Bond index for the one-year period.
High-yield bonds had the best returns for the first quarter, with the Salomon High Yield index returning 6%. The median high-yield bond managed account within PIPER trailed the index at 4.5%, but was best among the universe of PIPER bond managers. The Salomon Broad index returned 3.1% for the quarter.
Convertibles win
The quarter's best-performing managed fixed-income account was Zazove Associates LLC's high-yield convertibles portfolio at 16.4%. It was followed by: GW Capital Inc.'s value bond strategy, 7.2%; First Pacific Advisors Inc.'s intermediate bond portfolio, 5.9%; STW Fixed Income Management's long-duration tax-exempt portfolio, 5.7%; and Financial Management Advisors Inc.'s core fixed-income strategy, 5.3%.
Bridgewater Associates Inc.'s extra-long-duration bond strategy placed first in the managed account fixed-income universe for the year ended March 31 with a 23.6% return. It was followed by Jennison Associates LLC's active extra-long fixed-income portfolio, with 18.1%; Spectrum Asset Management Inc.'s unhedged total return strategy, 16.9%; Jennison's active long bond strategy, 16.8%; and McKee Investment Management Co. Inc.'s core enhanced portfolio, 16.6%.
Bridgewater's extra-long strategy also held first place among managed fixed-income accounts for the three years ended March 31 with a 14.5% return. It was followed by TranSierra Capital LLC's Municipal Bond Fund, 10.4%; Spectrum Asset's fixed-income-plus strategy, 9.8%; Peregrine Capital Management Inc.'s positive return core-plus strategy, 9.7%; and Jennison's active extra-long strategy, 9.2%. The Salomon Broad index returned 6.9% for the three years.
The positive-return style at Minneapolis-based Peregrine is designed to take advantage of significant price changes in long-term bonds without forecasting interest rate changes, said Jay Strohmaier, senior vice president.
Diversification alternative
Part of Jennison Associates' intent with its active extra-long and active long-bond strategies is to provide a strong alternative to equities, said Thomas Doyle, executive vice president and a fixed-income manager.
Jennison portfolio managers keep the average credit quality of portfolios near AAA. "When things are going really badly for stocks is the time that high-quality long-duration bonds do relatively very well" depending on interest rates, he said.
The two Jennison strategies focus on yield curve and spread-product management, with the extra-long strategy taking more aggressive yield curve bets.
Portfolio manager Jonathan Longley, executive vice president, said the yield curve in 2000 became inverted and afforded an opportunity to substitute zero-coupon bonds and futures "keyed off the shorter part of the yield curve, but which still maintained an overall portfolio duration equal to that of the index." His move placed the portfolio more in the middle of the yield curve. By the first quarter, when the yield curve reverted to a more normal shape, the portfolio gradually was reallocated to traditional long bonds, he said.
The collective fund version of Zazove's High Yield Convertibles Fund was No. 1 among commingled bond funds in PIPER for the quarter with a 15.7% return. It was followed by Lipper & Co. LP's Intermediate Bond Portfolio, 5.2%; Barclays Global Investors NA's Long Corporate Bond Index Fund, 5.1%; Northern Trust Global Investments' Monthly Long-Term Corporate Bond Fund, 4.9%; and Mutual of America Life Capital Management Corp.'s Mid-term Bond Fund, 4.9%. The first-quarter median return was 3.1%.
