TOP MANAGERS: High yield accounts for 8 of top 10 strategies in quarter

Domestic high-yield bond managers dominated other fixed-income strategies in the performance sweepstakes for the 12 months ended June 30.

According to the Morningstar Inc. Separate Account/Commingled Fund Database, eight of the 10 top-performing fixed-income managers for the year ended June 30 were high-yield managers. Horizon Asset Management Services Inc., New York, took first place with its high-yield strategy, which returned 17.2%. PENN Capital Management, Cherry Hill, N.J., was second with an 11.9% return on its high-yield bond strategy; DuPont Capital Management, Wilmington, Del., was third with 9.3%; DDJ Capital Management, Waltham, Mass., was fourth with 8.9%. Rounding out the top five was Pasadena, Calif.-based Western Asset Management with its ultrashort bond portfolio, which returned 8.9%.

The one-year return for the Lehman High Yield index was 4.8%, compared with -0.72% for the Lehman Aggregate Bond index.

The median performance of fixed-income managers in the Morningstar database for the year was 0.3%, while the Citigroup Broad Investment Grade Bond index was -0.81% for the period.

Scott Berry, a mutual fund analyst for Morningstar Inc., Chicago, said high-yield funds have continued to perform well because "there's really been no default to speak of in the high-yield universe. Without default, there's been nothing to spook investors."

Mr. Berry thinks the high performance is likely to continue. "As the high-yield market rallied, you have default and interest rates to consider. If rates were to go higher or the markets tanked, things would be different for high yield," said Mr. Berry.

He called General Motors Corp. and Ford Motor Co. "two of the big stories in high yield (in the past quarter). GM has seemed to tackle their problems and has been encouraging for high-yield managers. They are getting their costs under control," he said.

Horizon Asset Management's success can be traced to its cautiousness, said Raymond Duffy, chief executive officer. "We've done well on a relative basis because we don't take a lot of risk. We depend on a lot of research, and it does well for us. Between the research and being cautious and diligent, we've had good performance on the strategy."

Eric Green, director of research at PENN Capital, said the firm took advantage of some better performers such as Charter Communications Inc. and avoided the blowups in the industry. "We relied on very, very solid bond picking and avoided any difficult situations. We've pared back our exposure to the housing sector … auto parts companies and the restaurant sector," said Mr. Green.

"Companys' balance sheets are in very good shape. Corporations aren't slowing down; it's the consumers, so we've pared back on some consumer industries," he said.

Rounding out the top 10 for the year ended June 30 were three more high-yield strategies: Pioneer Investment Management Inc., Boston, which ranked sixth with a 8.6% return; Calamos Investments, Naperville, Ill., which returned 8.1%; and Eaton Vance Management, Boston, 7.9%. The intermediate government bond fund run by Franklin Templeton Investments, San Mateo, Calif., returned 7.6%, while Post Advisory Group, Los Angeles, had a high-yield portfolio that returned 7.5%.

Andrew Feltus, vice president and portfolio manager of Pioneer Investment Management's global high-yield strategy, said: "What we do different is we focus on international and emerging markets. By having foreign currency, we could ride out some of the bumps in the high-yield market. That — and good security selection like Stone Energy Corp., a natural gas provider, and Dollar Financial Corp. — is why we did so well."

Mr. Feltus expects the fund's performance to continue. "The environment is getting much better for high yield," he said.

Nick Calamos, senior executive vice president, head of investments and chief investment officer at Calamos Investments, said his firm is not focusing on distressed paper and "that's helped us a bit. We're looking at a total return focus."

High yield has done well for the past several quarters because "income flows are important in a flat market. And there have been low bankruptcy rates. Most of these companies (in which we invest) can refinance and roll much of this paper out for another five to seven years," he said.

Mr. Calamos expects the performance to continue because "the economy is in good shape and spreads will widen a little."

At Eaton Vance, portfolio manager Linda Carter said: "We have had a good amount in floating-rate securities and short maturities, which are yielding close to what long maturities were paying. We protect the portfolio with the floating-rate securities. Secondly, nine times out of 10, we think we are making good credit selections. We're not necessarily picking the top-performing industries, but picking a good credit. In the second quarter, we were over-weighted in telecom. We've been making good credit duration calls.

"Knocking on wood, the high performance will continue. We've been in the shorter maturity and shorter rates for the last 16 months," she said, adding that short-maturity bonds will probably continue to perform well.

Last quarter, the five top-performing managers for the five years ended June 30 were again dominated by high-yield strategies. Horizon Investment Management took first place with a 17.1% return; DuPont Capital Management's portfolio returned 16.3%, and DDJ Capital Management's strategy returned 15.4%. Franklin Templeton's intermediate government bond strategy returned 14.2%, and Post Advisory Group finished fifth with 14.1% on its high-yield fund.

In the commingled class, high-yield bond managers also had the best performance for the year ended June 30, with seven out of the top 10 running high-yield portfolios. Diversified Investment Advisors, White Plains, N.Y., came in first at 8.1%; Pyramis Global Advisors, Boston, notched second place at 6.6%; and Financial Management Advisors LLC, New York, took third and fourth places with returns of 5.3% and 5.2%, respectively, all for high-yield funds. Dwight Asset Management, Burlington, Vt., came in fifth with its SEI Stable Value fund which returned 4.5%.

The five top-performing commingled fund managers for five years ended June 30 were all high-yield managers. Pyramis came in first, returning 9.27%; Fort Washington Investment Advisors, Inc., Cincinnati, returned 9.24%; Financial Management Advisors returned 8.74% and 8.71% on its two high-yield strategies; and TCW Funds, Los Angeles, returned 8.4%.