High yield continues to live up to its name.
In the first quarter, nine out of 10 of the best performing bond portfolios were focused on high yield, be it straight high-yield fixed income, high-yield convertible securities or high-yield commercial mortgage-backed securities, according to Morningstar Inc.'s manager performance database.
Fixed-income managers interviewed agreed that continued focus on security selection, specifically looking for strong corporate balance sheets and special situations in such areas as telecommunications helped them post one-year returns that kept them atop the rankings.
The best overall one-year performer among separate accounts in the period ended March 31 was the total commodity return portfolio at Credit Suisse Asset Management LLC, New York, run by Nelson Louie, which posted a sharp 31.4% return. That was followed by Incline Village, Nev.-based Zazove Associates LLC's high-yield convertible securities strategy, which returned 15.3% and the high-income portfolio fund at SMH Capital Advisors Inc., Fort Worth, Texas, which returned 13.9%
Rounding out the top five were DDJ Capital Management LLC, Boston, which posted a 13.8% return in its U.S. high-yield bond portfolio, and Hyperion Capital Management Inc., New York, which earned 13.7% in its high-yield commercial mortgage-backed portfolio.
The Citigroup Broad Investment Grade Bond index returned 1.2% for the 12 months ended March 31 and -0.5% for the quarter. The Lehman Brothers High Yield Bond index returned 6.8% for the year and -1.6% in the quarter. The median managed account return for the year was 1.4% and for the quarter, -0.4%.
For the latest quarter, the Credit Suisse total commodity return portfolio ranked No. 1 overall with a 21.96% return. It was followed by a more down-to-earth 2.4% return posted by the fixed-income composite managed by Hoisington Investment Management Co., Austin, Texas. Rounding out the top five overall for the quarter were Hyperion's high-yield commercial mortgage-backed portfolio, with a 2.2% return, DDJ's U.S. high-yield bond strategy, with a 2.16% return, and New York-based Jennison Associates LLC's active extra-long fund strategy, which returned 2.15%.
"We all know commodities as an asset class have outperformed the fixed-income markets and equity markets," Credit Suisse's Mr. Louie said. The total commodity portfolio is a commodity index strategy benchmarked to the Goldman Sachs Commodity index.
"Various sectors have driven performance, but the primary drivers have been the base metals sector and the energy sector owing in part to infrastructure development projects by emerging market economies and an increase in manufacturing capabilities," he said.
Mr. Louie said he believes commodities are in a secular bull market.
In fixed income, while broad market trends are turning positive again after a couple of rough months earlier this year, security selection remains key to performance.
"The most important thing that worked for us year to date and over the last three years was security selection," said Tim Rabe, senior vice president and high-yield portfolio manager at Delaware Investments, Philadelphia, whose high-yield fixed-income portfolio earned the sixth overall spot with a one-year return of 12.1%.
"We think there's more opportunity today than there was at the beginning of the year," he said. "That being said, it's as much what you own as what you don't. The upside has been very diverse."
Christopher B. Cook, the San Francisco-based portfolio manager of the Zazove high-yield convertible portfolio, concurred that security selection was the key to his fund's performance.
"We don't spend a lot of time trying to think about where interest rates are going or where the economy is going," he said. "We're trying to look at individual businesses, understand what we're buying and the price we're paying for it."
Still, he noted the automobile and auto parts supplier sectors appeared to offer some good value.
"We have seen, as recently as late in the first quarter, that auto and auto parts convertibles have come in quite a bit," he said, adding, that one industry sector has not provided "a wealth" of opportunity.
Mr. Rabe said his fund has been underweight in auto suppliers but he and his colleagues "have spent a lot of time picking through the rubble trying to find a few hidden gems."
GMAC over GM
At SMH Capital, Dwayne Moyers, chief investment officer, said he doesn't like General Motors Corp., Detroit, but he does like its financing unit, General Motors Acceptance Corp.
"GMAC paper is one of our big names. It's ridiculously priced," he said. "That's the only area of GM that makes money."
He said the firm also bought bonds of MCI Inc., expecting that Verizon Communications Inc. would eventually acquire the company, beating out a competing bid from Qwest Communications International Inc. He called Verizon "much stronger" than Qwest. On May 2, Qwest gave up its pursuit of MCI.
"We think there's a lot of consolidation in the telecom sector, so we've owned a lot of telecom bonds," Mr. Moyer said.
He added that the firm also has exposure to the red-hot energy sector, with positions in Mission Resources Corp. and Callon Petroleum Co.
"There are going to be pockets of opportunities with the disruptions we've had in high yield," Mr. Rabe added. "Anytime there's a market correction, that will bring opportunities."
Top-performing fixed-income managers remain sanguine about their prospects for continued strong performance.
"There are a lot more opportunities today — this is probably the best high-yield market in terms of purchases on a going forward basis since late 2003," said Mr. Moyer at SMH Capital. "We should have very, very good returns over the next five years."
High yield was also the hot ticket for commingled fixed-income funds. For the first quarter, the Northern Trust Intermediate Credit Index from Northern Trust Global Investments, Chicago, ranked first in the commingled universe with a 4.03% return. The firm's Intermediate Government Bond Index ranked second with a 3.82% return, followed by the 20+ Treasury Bond Index from Barclays Global Investors NA, San Francisco, with a 1.48% return. Rounding out the top five in this category were Zazove's high yield convertible securities fund, which returned 1.32%, and Burlington, Vt.-based Dwight Asset Management Co.'s stable value fund, which returned 1.12% in the period.
Those numbers easily topped the median first-quarter return of –0.4%.
For the year ended March 31, the top performing commingled fund overall was Zazove's high-yield convertible securities fund, which earned 16.1%. Financial Management Advisors LLC, Los Angeles, returned 8.5% in its high-yield fixed income strategy, as did the core high-yield fixed income strategy from Cherry Hill, N.J.-based PENN Capital Management Co. Inc. Diversified Investment Advisors, Purchase, N.Y., returned 8.4% in its high-yield bond fund and General Motors Asset Management, New York, earned 7.5% in its high yield fixed income fund.
The median one-year return in this category was 1.7%. n