While a high-yield strategy was in the lead, convertible bonds drove fixed-income returns for the second quarter, filling seven of the top 10 slots in the PIPER managed account universe.
But high yield, which dominated the first quarter, posted the best returns for the year ended June 30, taking seven of the top 10 slots for the 12 months.
Long-duration bonds, which drove one-year returns for the year ended March 31, did not figure prominently among fixed-income winners for either the quarter or the year ended June 30, according to PIPER, the manager performance database owned by Pensions & Investments.
The High Yield Convertible Securities Program, managed by Zazove Associates LLC, Incline Village, Nev., posted the highest return among separately managed fixed-income accounts for both the quarter - 29% - and year - 52.7%, according to PIPER. The strategy also posted the highest return in the first quarter. Zazove's High Yield Convertible Securities Fund and Convertible Securities Fund also were the two best-performing overall commingled bond funds for both the second quarter and the year ended June 30. They returned 27.9% and 25.5%, respectively, for the quarter, and 55.5% and 36.5%, respectively, for the year.
The Citigroup Broad Investment-Grade Bond index (formerly called the Salomon Broad Bond index) returned 2.56% for the second quarter and 10.53% for the year ended June 30. The median separately managed account returns for those periods were 2.6% and 10.5%, respectively, according to PIPER. The median separately managed convertibles account returned 11.5% in the second quarter and 11.3% for the year ended June 30, and the median separately managed high-yield bond strategy returned 8.2% in the second quarter, and 17.5% for the year ended June 30.
The other four managed strategies in the top five for the second quarter were: U.S. Index Plus, managed by Western Asset Management Co., Pasadena, Calif., which returned 16.2%; Core-Opportunistic High Yield, managed by Penn Capital Management Co. Inc., Cherry Hill, N.J., 14.4%; High Income Convertible Security, managed by Oaktree Capital Management LLC, Los Angeles, 13.4%; and Convertibles, managed by Citigroup Asset Management, Stamford, Conn., 13.3%.
The other four managed strategies in the top five list for the year ended June 30 were: Extra Long Duration Bond, managed by Bridgewater Associates Inc., Westport, Conn., returning 43.2%; High Yield Fixed Income, managed by Conseco Capital Management Inc., Carmel, Ind., 31.3%; Oaktree Capital's High Income Convertible Security, 31.1%; and High Yield Bond Management, managed by Lincoln Capital Fixed Income Management Co. LLC, Chicago, 29.1%.
With interest rates scraping bottom, equity markets starting to rise and credit spreads tightening, the environment was perfect for convertible bond managers, said Gene Pretti, Zazove chief executive officer and chief investment officer.
"It's rare that you get all those things going for you all at once," Mr. Pretti said. "It would be very hard not to make money on convertibles." It's better to look at how convertible strategies are managed during the bad times because "in the bull market, everyone's a genius."
Zazove is the rare convertibles manager that does not use a stock-picking strategy or concentrate on one specific sector, he said; instead, it focuses on risk control and diversification.
Investors also were drawn to high-yield fixed income, said Christian M. Noyes, Penn Capital senior vice president and principal, because "they were craving yield, and craving an asset class that can give 7% to 10% over the next four to six years."
Penn Capital's high yield strategy is total-return driven, Mr. Noyes said. Half of the portfolio focuses on cash-paying, B-rated high-yield bonds, and the other half - the half that has driven returns - focuses on "stressed" and distressed debt strategies, he said, including CCC-rated securities that have returned 30% for the six months ended June 30.
The media sector was the strategy's most overweight industry, he added, with Adelphia Communications Inc., Charter Communications Inc., Paxson Communications Corp. and Emmis Communications Corp. among those contributing to the product's gains.
But both convertible and high-yield bonds may face tougher times ahead, said Zazove's Mr. Pretti.
There was a storm cloud for convertible arbitrage managers at the end of the second quarter, he said, with a flood of issuance, as well as new laws increasing dividend payments, which cheapened the market.
And the "ridiculous cheapness" of high yield over the last nine months is over, he said, adding he expects to see "more normal" returns on these strategies in the future.
Mr. Noyes concurred, saying he expects to see more standard high-yield returns of 7% to 10% going forward. n