Only four strategies in PIPER's managed accounts bond universe gained more than 10% last quarter. The U.S. convertibles strategy run by Capital Guardian Trust Co., Los Angeles, the quarter's best-performing fixed-income separate account, earned just less than 13% in the period. Zazove's high-flying high-yield convertibles program returned 9% for the period, according to PIPER.
The Citigroup Broad Investment Grade bond index posted 0.4% for the quarter and 4.2% for the year; the median PIPER bond return for both managed accounts and commingled funds was 0.4% for the quarter and 4.4% for the year.
High-yield strategies did well in the first half of 2003, before equity markets improved, because of tightening credit spreads, said Justin Kass, a portfolio manager on the U.S. high yield and convertibles team of Nicholas-Applegate Capital Management, San Diego. Once the markets came back, he said, "companies started reporting good numbers, and that helped convertibles."
Nicholas-Applegate's U.S. Convertibles strategy ranked second in the managed accounts universe for the quarter, returning 10.7%, and ranked 15th for the year, with 28.8%, according to PIPER. The strategy benefited from telecommunications and technology companies, Mr. Kass said, as well as those in the "basic materials" sector, including United States Steel Corp. and Arch Coal Inc. But "every single sector is recovering," he added.
Convertibles managers started 2003 on the trail of the "junkiest" securities, and did well when those delivered "stratospheric returns in the first three quarters," said Christopher J. Towle, partner and director of high yield and convertible investments at Lord, Abbett & Co., Jersey City, N.J. In the fourth quarter, the emphasis was more on stock selection, and this change in approach contributed to the drastically lower returns reported in the last quarter, Mr. Towle said.
Lord, Abbett's convertibles portfolio was overweight in cyclical industries, semiconductor equipment makers and generic drug companies, Mr. Towle said. Among its "junkier" holdings were Lucent Technologies Inc., Nortel Networks Ltd. and Charter Communications Inc., he said. The portfolio returned 9.9% in the fourth quarter, ranking fifth overall among managed bond accounts. For the year, it returned 25%, placing it in the top decile, according to PIPER.
The other two managed accounts in the quarter's top five were the convertibles strategy managed by TCW Group Inc., Los Angeles, which earned 10.2%; and the Calamos Growth and Income strategy, run Calamos Asset Management Inc., Naperville, Ill., which returned 10.2%, according to PIPER.
In the commingled fund universe, the top five strategies for the quarter were the Zazove Convertible Securities Fund, run by Zazove Associates LLC, Incline Village, Nev., which earned 12.9%; the high-yield fund managed by Loomis, Sayles & Co. LP, Boston, 11.2%; Zazove's high-yield convertibles fund, 10.9%; the EB Convertible Securities fund, run by Victory Capital Management Inc., Cleveland, 7.5%; and the high-yield fixed income strategy of General Motors Asset Management, New York, which earned just less than 7%.