Domestic high-yield bond managers generally continued to return the best performance among fixed-income managers in the 12 months ended March 31.
Eight of the top 10 performing fixed-income managers for the year ended March 31 were high-yield bond managers, according to the Morningstar Inc. Separate Account/Commingled Fund Database. In first place was Horizon Asset Management Services Inc., New York, whose high-yield strategy returned 15.8%. SMH Capital Advisors Inc., Fort Worth, Texas, was second with a 14.5% return on its high income portfolio; Pasadena, Calif.-based Western Asset Management's ultra-short bond portfolio was third with 12.2%; PENN Capital Management's opportunistic high-yield bond strategy was fourth at 12.1%; and rounding out the top five was the high-yield full discretion portfolio of Loomis Sayles & Co., Boston, with 11%.
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The one-year return for the Lehman High Yield Fixed Income index through the end of the first quarter was 8.4%, compared with just 2.26% for the Lehman Aggregate Bond index. The dominance of high yield continues a three-year trend — the average annualized return for the Lehman High Yield over the three years ended March 31 was 9.3%, compared with 2.6% for the Lehman Aggregate.
The median performance of fixed-income managers in the Morningstar database for the year ended March 31 was -0.1%, while the Citigroup Broad Investment Grade Bond index was -0.67% for the corresponding time period.
One credit strategist, Jeff Goetzke at Barclays Global Investors, San Francisco, predicted high yield will continue to dominate investment grade in fixed income for the next 12 to 18 months. "You've seen a huge improvement in the credit quality of high-yield companies," he said. "Ever since we came out of the 2001 and '02 recession, there's been nothing but a focus on improving the balance sheet fundamentals of those companies. There's really nothing that we see that's changing that focus. It's an extremely strong environment."
Mr. Goetzke also noted that today's environment differs from the late 1990s, when high-yield fixed income also had a strong run. "If you go back to 1997 when you saw comparable spreads to Treasuries to today, the credit quality of those companies now vs. then is substantially better. We expect that trend to continue," he said. "There's been huge demand for high-yield synthetic products such as collateralized debt obligations. We don't see anything changing that at least for the next 12 to 18 months."
However, Jack Malvey, chief global fixed income strategist at Lehman Brothers Inc. New York, said high yield is nearing the end of its run.
"I think there will be some hints of a turn as soon as the third quarter," said Mr. Malvey. "The high-yield market is very fully priced right now. The yield between double B and single B debt is the tightest it's ever been. Investors are only squeezing about 32 basis points of return from investing in high yield vs. investment-grade debt. That's generally indicative of a cycle that's in its later stages."
Officials at Horizon did not return calls by press time for comment.
Dwayne Moyers, chief investment officer and high yield portfolio manager at SMH, said the firm adds value over the high-yield index by being a concentrated manager.
"We've been adding value over the last 11 years. Our overall returns are significantly higher then the benchmark," said Mr. Moyers. "Yes, high yield has done well. It came off of a dramatic bottom in 2001 and was extremely undervalued in 2001. Today, we're at a pretty normal fair value for high yield. Our expectation in general in terms of returns is Treasury plus 200 basis points. We are a concentrated manager that only buys 25 to 35 securities in the high income fund. That gives us the chance for above-average returns. If you had to build a portfolio of 200 names, you'd probably move toward the returns of the high yield index."
Mr. Moyers said the performance of the portfolio was helped by bonds in the telecommunications sector, as well as those of Six Flags Amusement Parks Inc. "It was issues like Six Flags that drove some of the results above the benchmark," he said.
Chris Noyes, director of marketing at PENN Capital, said the firm can deliver alpha to its clients because of its nimble size. "We do bring a liquidity advantage to the marketplace," said Mr. Noyes. "Our size allows us to be very active in our portfolios in terms of trading. A lot of our competitors are much larger and run multiple billions of dollars in the high-yield space. When you consider the average deal size in the high-yield marketplace is $200 million, if this were the world of equities, high yield would probably be comparable to microcap."
