Long-term bonds were again the top-performing bond strategies in the fourth quarter as a worsening economic environment gave advantages to investors in those strategies for the year ended Dec. 31, according to Morningstar Inc.s separate account/collective investment trust fund database.
The top eight strategies for the year were all long term, with two intermediate-term strategies rounding out the top 10. High-yield managers dominant in previous five-year periods were battered, with no manager coming within 20 percentage points of the lowest return among the top 10. High-yield strategies also disappeared completely from the top gross returns for the five-year period.
The median return for overall U.S. bond accounts for the year was 2.23%. In the same period, the Lehman Brothers U.S. Government/Credit bond index was up 5.7% and the Credit Suisse High Yield index dropped 26.71%.
NISA Investment Advisors LLC, St. Louis, had the top-performing strategy for the year ended Dec. 31, returning 38.35% for its Long Duration Consolidated strategy. The strategy has traditionally been overweighted in Treasuries.
The positive performance in our long-duration accounts more or less has been shared across virtually all our fixed-income assignments, said Jess Yawitz, chairman and chief executive officer at NISA. The simple answer is for the last 20 months or so, weve pretty much gotten it right with important dimensions, and this applies to both our long duration and core assignments, he said. Weve underweighted in corporate bonds and as a firm weve avoided the toxic asset classes that have caused so many problems with our competitors, he added.
Over time, Mr. Yawitz sees volatility continuing. He also said he doesnt see inflation as much of a problem for the foreseeable future. Theres so much excess capacity in the economy, and that grows every month, he said. The 64-dollar question in the near term is digesting a lot of Treasuries, and Id give the market good grades in terms of its interest in Treasuries.
Austin, Texas-based Hoisington Investment Management Co.s Macroeconomic Fixed Income Composite strategy was second for the year with a gross return of 36.49%. It also had the highest five-year gross return of all bond managers with a compound-annualized return of 13.52%.
The continued success of the fund which ranked second for the year ended Sept. 30 with 12.42% is due to its investing strictly in Treasury securities and long zero-coupon bonds, following the downward curve of inflation, said Lacy Hunt, executive vice president and chief economist at Hoisington.
We think the economy has entered debt deflation, a rare but not unprecedented event, said Mr. Hunt. Weve got almost $3.60 of debt for every dollar in the GDP. These high levels of debt lead to falling inflation rates. So when the inflation is trending downward, we position them along the curve, very long duration. It paid off handsomely for us and we think over the next several years were going to see the Treasury rates continue downward. Weve done some analysis; if you look at the debt deflation post-1988 in Japan, which continues to this day, the lows in interest rates actually occurred in the 14th or 15th year, he added. When youre unwinding such unprecedented debt levels, its going to take a very long time, said Mr. Hunt, whose strategy had $4.5 billion as of Dec. 31, according to Morningstar.
New York-based Jennison Associates saw two strategies among the top 10 overall with its Active Extra Long Fixed Income strategy ranked No. 3 for the year with a gross return of 29.69% and its Active Long Government Strategy at No. 5 with 25.95%.
New to the top 10 overall bond category was Stamford, Conn.-based Hillswick Asset Management LLC, whose long-duration government bond strategy ranked No. 4 with 27.4%.
This is an outstanding opportunity to lock in corporate bond spreads, and if you want to put on an LDI (liability-driven investment) strategy this is a tremendous opportunity, said Mark McDonnell, president and senior portfolio manager at Hillswick. With long corporate bond spreads the way they are, you lock in some yields for the next 3 to 5 years. Over the next year can you get hurt? Absolutely, but we certainly think you get compensated for the risk. The strategy had $157.4 million in assets at year end.
TCW Group was No. 8 with a one-year gross return of 19.22% for its mortgage-backed security strategy.