WAYNE, Pa. - Global and international fixed-income portfolios outperformed both U.S. fixed income and U.S. equities for the year ended June 30, according to InvestorForce.
The firm's Quarterly Market Review lists the top performers among 2,595 portfolios covering 19 asset styles in the InvestorForce manager universe.
The year's best performer was an emerging markets debt portfolio managed by Ashmore Investment Management Ltd., London, that invests solely in Russian debt. The $54 million London-based Ashmore Russian Debt Portfolio returned 8.7% for the quarter and an astronomical 71.9% for the year ended June 30. The Ashmore portfolio returned an annualized 108.9% for the three years and 41.4% for the five years ended June 30.
By comparison, the median return for emerging markets debt portfolios in the InvestorForce universe was 7.1% for the year.
Jerome Booth, head of research at Ashmore, said Russia's 1998 domestic debt default, currency devaluation and moratorium on debt payments has benefited the 6-year-old portfolio in the long run. None of the actions led to drastically increased inflation in the European nation, he pointed out, and in addition, Russia has been a very liquid market.
"The Russian debt market has done very well so far. ... The (Vladimir) Putin presidency has had a strong influence" with the pension and banking reforms his administration has proposed and/or passed, said Mr. Booth. Mr. Putin's 13% flat income tax rate has had a beneficial effect on the portfolio, and the recent sales of Russian oil to the United States also has helped, he said.
Caution on Russia
Despite the outperformance, Mr. Booth cautioned institutional investors about directing all of their international assets to in Russia. "Investing in Russia is something you have to keep your eye on," he said.
Delaware International Advisers Ltd., London, manages two developed-market bond portfolios that won their categories in the InvestorForce universe. The firm's Global Fixed and International Fixed portfolios had the highest global and international bond portfolio returns for the year ended June 30, with returns of 22% and 22.7%, respectively.
"There is better value outside the United States," said Christopher Moth, chief investment officer, global fixed income and currency for Delaware.
Both the 8-year-old, $300 million global portfolio and the 5-year-old, $45 million international portfolio are unhedged, and invest in all types of bonds. The global strategy is underweighted to the U.S. bond market because U.S. fixed-income issues are overpriced, he said.
Better value overseas
"We, for a long time, have been saying the U.S. dollar is overvalued," said Mr. Moth, adding Delaware is not the only skeptic. "Overseas investors are starting to question the U.S. market," he said. As a result, there has been a surge of interest in non-U.S. bonds even though they've been poor performers in recent years, he said. Mr. Moth suspected recently improving returns in the asset class and the poor performance of others sparked interest.
One of the domestic fixed-income standouts was Los Angeles-based TCW Group Inc.'s Strategic Mortgage-Backed Securities, which managed a 31.6% return for the year ended June 30. The 11-year-old, $600 million portfolio had the highest return for all intermediate-duration domestic fixed-income portfolios for the time period. The median return for domestic intermediate-duration portfolios in the InvestorForce universe was 8.2%.
"The strategy invests in attractive and compelling mortgage products," said Claude Erb, TCW managing director. He said the portfolio's selection process is value oriented and accepts only AAA-rated securities. The portfolio averages a total of 30 securities at a time.
Several equity portfolios with non-U.S. disciplines have outperformed domestic equity strategies, as well. Both Pictet International Management Ltd.'s Eastern European equity portfolio, the top-performing emerging markets equity strategy, and Morgan Stanley Investment Management Inc.'s Global Franchise portfolio, the top-performing global equity strategy, outperformed all of the domestic large-cap and midcap equity portfolios in the InvestorForce universe.
Montreal-based Pictet's portfolio returned 27.1% for the year ended June 30, and New York-based Morgan Stanley's portfolio returned 20.7% for the same period. Pictet officials were not available for comment by press time.
Morgan Stanley looks for high-value companies regardless of the country, said Hassan Elmasry, Morgan Stanley portfolio manager and executive director, adding, "For us, value means free cash flow"
The 6-year-old, $1.1 billion strategy has a heavy concentration in U.K. and continental European stocks, which have not been as poorly affected by the U.S. bear market as American stocks have been, he said.
Domestic equity success
In the small-to-microcap value universe, Cambridge, Mass.-based Numeric Investors LP's Small Cap Value portfolio was the top performer, returning 28% in the year ended June 30. The 4-year-old, $273 million portfolio averages 170 to 180 holdings and has a turnover rate of approximately 200%.
"All sectors added value for us," said Arup Datta, senior portfolio manager. Portfolio manager Jerry Campbell did point to New Century Financial Corp. and Flagstar Bancorp Inc. as two of the portfolio's best performers.
Also, San Francisco-based Sterling Johnston Capital Management LP's Micro Cap Aggressive Growth Equity portfolio - which was near the top of the Pensions & Investments Performance Evaluation Report's list of top-performing growth equity accounts in the first quarter - was the best-performing equity portfolio strategy in the InvestorForce ranking, with a 42.1% return for the year ended June 30. The strategy also had strong annualized three- and five-year returns of 51.1% and 54.3%, respectively.