Some high-yield and convertible bond managers continued to reap strong returns in the first quarter, helped by the improving corporate profit picture, according to PIPER.
Zazove Associates LLC's High Yield Convertible Securities strategy returned 8.6% for separate accounts and 9.2% for commingled accounts, which put Zazove in first place for commingled accounts and second for separate accounts, behind New York-based Ryan Labs Inc.'s NDT Enhanced strategy, which returned 8.76%. For the one-year period ended March 31, Incline Village, Nev.-based Zazove led all bond managers in both the separate account and commingled categories as its high-yield convertible strategy returned 67.4% for separate accounts and 66.6% for commingled accounts, according to PIPER, the manager performance database owned by Pensions & Investments.
"Over the last year, what we saw was an extraordinary rally in credit and an extraordinary narrowing of credit spreads vs. where we exited in 2002," said Christopher Cook, Zazove Associates' San Francisco-based high-yield convertible portfolio manager.
"A few things that happened to enable that credit rally to occur were that capital markets opened back up for lower-quality credits and for the most part, the (earnings) numbers that companies are reporting are reliable — people and corporations are doing the right things and are trying to be more conservative and manage their businesses for long-term shareholders," he added.
Mr. Cook said his portfolio is well-diversified across industries but he noted that on a sector basis, independent power, technology and telecommunications led the pack. "Across the board it was a fairly systematic rally in all our positions and in credit in general," he said. "Over the last year we weren't out of kilter with most other managers' exposure either on a name-by-name or industry basis."
The Citigroup Broad Investment Grade bond index recorded a 2.7% return for the first quarter and a 5.5% return for the 12-month period. The median first-quarter return overall for fixed-income separate accounts was 2.5%, according to PIPER. For the year, the median was 5.5%.
Among separate accounts for the 12 months ended March 31, the Zazove portfolio was followed by GEM Capital Management Inc.'s Convertible Securities strategy, which returned 36% for the year; Nicholas-Applegate Capital Management's U.S. Convertibles portfolio, 34.8%; and Capital Guardian Trust Co.'s U.S. Convertibles strategy, 34.6%.
GEM's portfolio returned 3.1% in the first quarter while the Nicholas-Applegate convertible strategy returned 4.7% and Capital Guardian's approach, 1.8%.
Gerald Untermann, convertible securities portfolio manager at New York-based GEM Capital, said the asset class has had one of the best risk-reward characteristics in the fixed-income universe, with above-average yields and strong equity components.
"We look for companies first," he said. "The primary driver is finding companies whose fundamentals are compelling and whose stock prices are undervalued. Secondly, whether the convertible security is priced right." His focus is on midcap and large-cap names where the liquidity is high.
He said convertibles he continues to hold include energy company TXU Corp.; cable television operator Cablevision Systems Corp., which Mr. Untermann called "a very asset-rich company" although a stock "everyone loves to hate"; and Nextel Communications Inc., the wireless communications company.