Top-performing fixed income managers
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August 24, 2009 01:00 AM

Top-performing fixed income managers

Fixed income: High yield makes a comeback, but long-duration, government bonds still dominate

Jeff Nash
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    Long-duration and government bond managers were the leaders in fixed-income performance in Morningstar Inc.'s Separate Account/Collective Investment Trust database for the year ended June 30, as investors took advantage of upheaval in the credit markets.

    Similar to the first-quarter's results, managers of long-duration and government strategies dominated the winner's circle. Combined they took five of the top 10 spots for the 12-month period, compared with six of the top rankings the previous quarter. The top 10 was rounded out with three intermediate strategies, one high-yield strategy and one multisector strategy.

    This was the first top 10 finish for a high-yield strategy in several quarters.

    High-yield strategies, which had dominated the ranks prior to 2008, had been excluded from the year's best for the past several quarters. The median return for high-yield bond accounts was -3.68% for the year ended June 30, and 4.41% for the five years, up from -15.99% and 1.1%, respectively, the previous quarter. (All returns for periods of more than one year are compound annualized.)

    The median return for overall U.S. bond separate accounts was 5.28% for the 12 months through June. Over the same period, the Barclays Capital U.S. Government/ Credit Bond index posted a 6.63% increase and the Credit Suisse First Boston High Yield index was down 5%.

    “The last year's results were a reflection of a flight to safety for many investors,” said Steve Deutsch, director of separate accounts and collective investment trusts at Chicago-based Morningstar, noting that longer-term and government bonds performed better as investors sought out less-risky fixed-income options.

    Although high-yield strategies got pummeled for the year ended June 30, they outperformed all other strategies for the quarter as credit spreads continued to tighten and high-yield bonds benefited from that price increase. For the second quarter, high-yield strategies returned 17% overall, up from 5.91% the previous quarter. Eight of the top 10 performers for the quarter were high-yield managers.

    “This confirms that risk was severely mispriced before and during the credit crisis,” said Mr. Deutsch. “Investors with that conviction benefited during the last three months. We've gone full cycle, as the market went from no risk premium, to excessive risk premium, and now the markets appear to be thawing again.”

    The top three high-yield strategies for the quarter were: Principal Global Investors' Spectrum Preferred Securities, with 40%; Security Global Investors' High Yield Fixed Income, with 33.04%; and MFC Global Investment Management's U.S. High Yield, with 30.24%.

    Unusual experience

    In the overall fixed-income category, leading the top 10 for the 12 months was Los Angeles-based TCW Group Inc.'s Strategic Mortgage-Backed Securities strategy, with a 29.8% return — more than eight percentage points ahead of the No. 2 top-performing manager. The strategy also posted the best five-year return of any bond account in the database, at 11.69%.

    Jeffrey Gundlach, chief investment officer and chairman of TCW's multistrategy fixed-income committee, credits his firm's “superior risk management and research” for steering his bond strategy to the top of the list. “How can a strategy that invested in mortgages through last year's turmoil be the top performer?” he said. “Well, it's very unusual for a product to have the kind of experience this one has.”

    Over the past year, the Strategic MBS portfolio has shifted from having zero credit risk in agency-guaranteed mortgages to roughly 50% credit risk in non-guaranteed mortgages, taking advantage of quality assets whose values have been crushed by the market, Mr. Gundlach said.

    Atlanta Capital Management Co. LLC's High Quality Short Duration 0-2 Year strategy was No. 2 for the year with 21.34%.

    “Essentially, the performance was driven by what we didn't own as much as it was driven by what we did own,” said James Womack, managing director at Atlanta-based Atlanta Capital. “We mostly owned asset-backed securities, with a high emphasis on having as diverse a pool of borrowers as possible. We didn't own loans backed by adjustable-rate mortgages.”

    Although spreads continue to narrow, Mr. Womack said the portfolio continues to look for high-quality new issues of asset-backed securities, especially auto loans, which he said provide stable cash flows.

    In third place was TCW Group's Opportunistic Core Plus Fixed Income strategy, which delivered a 14.51% return for the year.

    Finishing in fourth for the year was New York-based Utendahl Capital Management LP's Mortgage Backed Securities strategy with 14.07%, while in fifth was New York-based Jennison Associates LLC's Active Extra Long Fixed Income strategy, with 13.25%.

    Hillswick Asset Management LLC, Stamford, Conn., ranked No. 6 with its long-duration government strategy, which boasted a 12.83% return for the one-year period.

    Anders Ekernas, chairman, CIO and chief compliance officer at Hillswick, said that while the strategy was underweight credit risk last summer, it began to aggressively buy short-duration corporate bonds after the collapse of Lehman Brothers Holdings Inc. in September as risk premiums rose. “The premiums were high and attractive, but the risks were higher than normal too,” said Mr. Ekernas. “So we stayed primarily in higher quality bonds, avoiding triple-B rated bonds for A and AA.”

    As spreads narrowed again this year, Mr. Ekernas said the portfolio has been trimming its corporate bond exposure and reinvesting in government agencies, such as Private Export Funding Corp. bonds and Tennessee Valley Authority bonds. The strategy also has built up a 10% allocation to bonds issued through the Temporary Liquidity Guarantee program, which was launched in November 2008 to help issuers of corporate debt obtain financing during the credit crisis.

    “The market moved too fast in terms of risk appetite,” said Mr. Ekernas. “There is a high probability there will be some new scare. If so, we have the dry powder to move out of Treasuries and agencies and move into corporate and asset-backed securities when those become cheap.”

    Filling out the top 10 were New York-based MacKay Shields LLC's Core Plus (II) strategy, with a 12.76% one-year return; Seattle-based Pugh Capital Management Inc.'s Long Duration Fixed Income strategy, at 12.59%; Jennison's Active Long Government strategy, at 12.31%; and Burlington, Vt.-based Dwight Asset Management Co. LLC's High Yield strategy, with 11.86%.

    Long-duration and government bond strategies also dominated the rankings for the five years through June 30, led by TCW"s Strategic Mortgage-Backed Securities strategy, with an annualized return of 11.69%; Jennison's Active Extra Long Fixed Income strategy, at 9.03%; Austin, Texas-based Hoisington Investment Management Co.'s Macroeconomic Fixed Income Strategy, at 8.7%; Hillswick's Long Duration Government Strategy, at 8.55%; and Jennison's Active Long Government strategy, at 8.54%.

    For the five-year period, the median return was an annualized 4.84%, while the Barclays Capital U.S. Government/Credit Bond index posted a 5.41% gain.

    Topping the limited-duration category for the one-year and five-year period was New York-based Lazard Asset Management LLC's U.S. Enhanced Core strategy, with 11.67% and 6.52%, respectively.

    Atop of the intermediate-duration bond rankings for the year was TCW Group's Opportunistic Core Plus Fixed Income strategy, with 14.51%, while for the five years New York-based Ryan Labs Asset Management's Long Liability Enhanced strategy led with an annualized 7.2%.

    New York-based Morgan Stanley's Emerging Market Debt strategy delivered the strongest emerging debt returns for the year with 12.73%. For the five-year period, Los Angeles-based Capital Guardian Group's Emerging Markets Fixed Income strategy boasted the best return with an annualized 13.87%.

    Among bond collective investment trusts, the overall median was 5.65% for the year ended June 30 and 4.94% for the five years.

    Wilmington Trust Fiduciary Services Co. took the two top spots for the 12 months with its Long Duration Portfolio, at 11.92%, and its Navigator U.S. Fixed Income Fund 3, at 10.78%.

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