Domestic high-yield bond managers again dominated fixed-income strategy performance, claiming nine of the top 10 spots in the Morningstar Inc. Separate Account/Commingled Fund Database for the year ended Sept. 30.
Topping the list was the high-yield strategy of Advisors Asset Management, Monument, Colo., with a gross return of 20.48%. Other high-yield managers in the top five were MFC Global Investment Management and Pioneer Investment Management, both of Boston, at 15.93% and 14.99% respectively, and Advisors Aggressive Taxable Discipline fund at 13.38%.
Western Asset Management Co., Pasadena, Calif., took third with its multisector fund, U.S. Commodity Plus, returning a gross 15.06%.
The rest of the top 10 were high-yield managers: DuPont Capital Management, Wilmington, Del., at 11%; Reams Asset Management, Columbus, Ind., at 10.98%; Prudential Financial, Newark, N.J., at 10.7%; Calamos Investments, Naperville, Ill., at 10.5%; and Pioneers global high-yield bond, at 10.28%.
The dominance of high-yield certainly has been somewhat of an extended trend, said Steve Deutsch, Morningstar director of separate accounts and collective investment trusts. It dates back to at least the first quarter of 2006, he said.
I guess its still more risk, more return, Mr. Deutsch said. They (high-yield funds) seem to have made it through the credit squeeze in August without much of an effect on their one-year or five-year returns.
The median high-yield fund in the Morningstar database returned 8.05% for the year ended Sept. 30, while the median return across all fixed-income strategies was 5.41%. Those returns are down from 10.97% and 6.18%, respectively, for the year ended June 30. The Credit Suisse High Yield index returned 8.36% for the year, while the Lehman Brothers U.S. Government/Credit Bond Index returned 5.08% for the same period.
Scott Colyer, CEO and chief investment officer for Advisors Asset Management, attributed success of the two funds in the top 10 to subjective, bottom-up picks. We dont do sector bets, Mr. Colyer said. The success is because of analysts whove worked for decades (in finding undervalued picks).
The distressed fund did well in the automotive and airline sectors. Now theyre looking at distressed timber and technology, using a bottom-up approach to find debt either out of favor or in default (or about to be so). The aggressive taxable funds approach is somewhat different, using an 80/20 alpha/beta approach, with the bulk being in traditional high-yield and the alpha portion coming from bottom-up opportunistic investments.
Its been tough to perform this year (in the high-yield space), Mr. Colyer said. (The 80/20 approach) allowed us to outperform. The fund recently bought derivative-type bonds tied to equity plays at steep discounts.
MFC Global owed part of its success to restructuring at Northwest Airlines Corp. and United Airlines Inc., and it did very well in Freeport-McMoRan Copper & Gold Inc.s acquisition of Phelps Dodge in March, said Arthur Calavritinos, senior vice president and portfolio manager. Also, the cable sector performed well for us.
The credit squeeze wasnt pleasant, he said, but the manager stuck with fundamentals and found bargains that were undervalued after liquidity-based sell-offs, especially with two casino bonds, Trump Entertainment Resorts Inc. and Harrahs Entertainment Inc. And MFC stayed away from new issues, which Mr. Calavritinos said have yet to recover the way other paper has.
At Pioneer, subprime lending and the credit squeeze seemed to play into the firms strategy, said Tracy Wright, portfolio manager.
Our high-yield holdings are generally higher quality. When (high yield) had missteps in July, (and there was a flight to quality) our higher quality outperformed, she said. Also, the high-yield fund has about 15% equity investments, which augmented the funds performance. So did mergers and acquisitions activity, including Basell AFs acquisition of Lyondell Chemical Co. in May. Strategically, the fund was overweight in home builders and autos.
For the future, Advisors Asset is looking toward perhaps distressed mortgages, home builders or REITs with mortgage exposures. We tend to gravitate to places the market overlooks or values extremely negatively, Mr. Colyer said. But hes wary about snapping up mortgage-related products because were not convinced we can understand the value yet.
MFC Global is also looking closely at mortgage-based investments. The fallout hasnt finished yet, Mr. Calavritinos said. The firm has added to mortgage-based investments, from a base of zero. Weve just started nibbling at some of that.
Pioneer will stick to its higher quality strategy. We still tend toward being defensive, if you will, Ms. Wright said. Shes looking to add exposure in the energy and healthcare sectors.
Move toward global
Morningstars Mr. Deutsch said that in general, funds are moving toward global and international fixed income, which may seem to indicate some pension plans are looking to increase their fixed-income returns.
Top-performing balanced funds beat all fund types for the year. A.R. Schmeidler & Co. Inc., New York, returned 28.99% in its domestic balanced fund, while Wellington Management, Boston, returned 31.93% in its global real assets balanced fund.
High-yield managers also dominated the list of top performers for the five years, taking nine slots. DuPont led with 24.65%, with AllianceBernstein LP, New York, second at 20.05%, DDJ Capital Management LLC, Waltham, Mass., with 17.06%, MFC Global, at 16.85%, and PENN Capital Management Inc., Cherry Hill, N.J., rounding out the top five for the five-year period with 16.74%. All returns are annualized.
Among commingled funds, high-yield strategies also dominated, taking nine of 10 top spots. However, the leader was a short-term manager, Amalgamated Bank, Washington, whose Ultra Construction Loan Fund returned 9.98% for the year. The rest of the top five were: Putnam Investments, Boston, at 9.37%; Bradford & Marzec, Los Angeles, at 8.97%, Lehman Brothers Asset Management LLC, Chicago, at 8.32%; Capital Guardian Trust Co., Los Angeles, at 8.31%. The median collective investment trust in the Morningstar database returned 5.29% for the year.