Top-performing fixed income managers

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, we’ve pretty much gotten it right with important dimensions, and this applies to both our long duration and core assignments,” he said. “We’ve underweighted in corporate bonds and as a firm we’ve 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 doesn’t see inflation as much of a problem for the foreseeable future. “There’s 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 I’d 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. “We’ve 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 we’re going to see the Treasury rates continue downward. We’ve 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 you’re unwinding such unprecedented debt levels, it’s 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.

Long-duration bond returns improved from the previous quarter among managers in the Morningstar universe. The median one-year gross return for long-duration bonds was 3.98% as of Dec. 31, up from -0.84% for the year ended Sept. 30. The median gross return for the five years ended Dec. 31 was 5.53%, up from 4.09% for the five years ended Sept. 30. For periods ended Dec. 31, the Lehman Brothers Government/Credit Long Bond index returned 8.44% and 6.31%, respectively.

High-yield strategies definitely lost favor since the last report. The median gross return for the year ended Dec. 31 was -22.1%, a precipitous drop from the -7.7% for the year ended Sept. 30. The gross return for the five years ended Dec. 31 was a compound-annualized 0.34% vs. 5.22% for the same period ended Sept. 30.

The Short Duration High Yield strategy of AXA Investment Managers Inc., Greenwich, Conn., was ranked No. 1 for both the year and five year-periods with gross returns of -7.71% and 3.01%, respectively. Intrepid Capital Management Inc., New York, ranked second, with its high-yield strategy returning -8.48% for the year ended Dec. 31. That strategy ranked first for the year ended Sept. 30, with a gross return of 1.42%.

In the limited-duration bond universe, the U.S. Enhanced Core strategy of Lazard Asset Management LLC led in both one-year and five-year gross returns with 9.92% and 5.81%, respectively. The median one-year gross return was 3.79% and the five-year was 3.83%. While in intermediate-duration bonds, Ryan Labs’ Long Liability Enhanced strategy was No. 1 in both one-year and five-year gross returns, with 17.35% and 8.06% respectively. The median one-year gross return was 3.40% and the compound-annualized five-year median was 4.31%.

World bonds fell slightly, with a median one-year gross return of -0.26% as of Dec. 31 vs. 1.14% for the same period ended Sept. 30.

London-based Mondrian Investments’ international fixed unhedged strategy was top-ranked with a one-year gross return of 11.94% as of Dec. 31.

In collective investment trusts, the leading overall bond manager was San Francisco-based Barclays Global Investors, with a one-year gross return of 34.2% for its 20+ Treasury Bond Index commingled fund. BGI’s Long Government Bond Index commingled fund came in second with a one-year gross return of 23.10%; Prudential Retirement’s Government Securities PIM commingled fund was third with 12.84%; Wilmington Trust’s Long Duration fund was fourth with 9.58%; and AST’s Short-term Bond Index ETF Fund 96 was fifth with 9.47%. The median one-year gross return for overall collective investment trust bond strategies was 3.31%.

BGI’s 20+ Treasury Bond Index commingled fund was also the leading CIT bond manager in five-year gross returns with 12.14%, while its Long Government Bond index commingled fund was second with 9.72%. Rounding out the top five were Amalgamated Bank’s Ultra Construction Loan fund at 7.41%; Mellon Capital Management’s Corporate Active Bond Strategy commingled fund at 6.09%; and Prudential Retirement’s Government Securities PIM commingled fund at 6.08%. The median five-year gross return for overall collective investment trust bond strategies was 3.91%.