The top commingled fixed-income fund was the high-yield convertibles fund managed by Zazove Associates LLC., Incline Village, Nev., which returned 7.6% in the third quarter and an eye-popping 97.3% for the 12 months ended Sept. 30. Zazove's high-yield convertibles strategy also took first place for the quarter and the year in the separate account universe, with returns of 9.5% and 93.2%, respectively.
The Citigroup Broad Investment Grade bond index returned -0.2% in the quarter and 5.5% for the year ended Sept. 30. The median PIPER commingled overall domestic fixed-income account returned just 0.1% in the third quarter and 5.6% for the year. In the managed account universe, the median was 0.1% in the quarter and 5.7% for the year.
The median manager in PIPER's high-yield universe (covering both commingled and separately managed accounts) returned 2.6% in the quarter and 23.9% for the year ended Sept. 30.
In addition to the high-yield segment, convertible securities strategies also were among the best performers in the PIPER fixed-income universes.
In the quarter among commingled funds, Zazove's High Yield Convertibles Fund was followed by the high-yield fund managed by Loomis, Sayles & Co. LLP, Boston, which returned 4.9%, and Zazove's convertible securities fund, which returned 4.8%. Rounding out the top five were the high-yield fund managed by Putnam Investments LLC, Boston, with a return of 4.4% and the high-yield bond fund of Diversified Investment Advisors, Purchase, N.Y., returning 3.7%. For the year ended Sept. 30, Zazove's high-yield convertibles fund was followed by its convertible securities fund with 66.9%; the Loomis high-yield fund, 48.7%; Loomis' Fixed Income Fund, 31.5%; and Putnam's high-yield fund, 30.9%.
The story was much the same for the fixed-income separate accounts where the Zazove high-yield convertibles portfolio returned 9.5% and the U.S. Convertibles portfolio of Capital Guardian Trust Co., Los Angeles returned 5.1%; New York-based Golden Tree Asset Management LP's long-term high-yield portfolio gained 4.95%; the convertible securities portfolio of GEM Capital Management Inc., New York, returned 4.8%; and the high-yield account of MacKay Shields LLC, New York, at 4.3%.
Chris Cook, portfolio manager and director of high-yield securities in Zazove Associates' San Francisco office, said he looks for "underpriced credits," in the convertible bond market, bonds issued by companies with depressed stock values in the short term but whose underlying fundamentals appear favorable. Often these bonds are held by convertible arbitrage managers who buy convertible bonds and simultaneously short the stocks. If the stock price falls, convert arb managers profit from covering their short position and sell the bonds, he said. He said the "vast majority" of the bonds Zazove has purchased at "60 cents on the dollar and hopefully mature at par or go higher if the stock runs up."
"This market is driven by the convertible arbitrage players," said Mr. Cook. "We have clearly benefited from the tightening of the high yield credit markets, and the rising stock market has helped."
Complete PIPER charts