(updated with correction)
Long-term bond strategies led the pack for the year ended Sept. 30, although high-yield and multisector strategies began to move back onto the list of top performers in Morningstar Inc.'s separate accounts/collective investment trust database.
Long-duration strategies took five of the top 10 spots, with two high-yield strategies, two multisector strategies and one intermediate-term strategy rounding out the list.
The median return for overall U.S. bond accounts was 11.85% for the 12 months. The Barclays Capital U.S. Government/Credit Bond index posted a return of 11.46% and the Credit Suisse First Boston High Yield index posted 17.89% for the same period.
Steve Deutsch, director of separate accounts and collective investment trusts at Morningstar, Chicago, said the credit market is beginning to return to normal with investments other than government bonds producing high returns.
“Basically, the more-risk more-reward (concept) will start to prevail again,” he said. “Fixed income will no longer outperform equities for a long period. That's what we would expect in a normal credit market.”
In overall performance, Los Angeles-based TCW Group Inc. topped the bond rankings with its Strategic Mortgage-Backed Securities strategy returning 49.84% for the year. The strategy beat the second highest performing strategy by 15.07 percentage points; it also placed No. 1 in the five-year category with a compound annualized 13.84%. (All returns for periods of more than one year are compound annualized.)
Jeffrey Gundlach, chief investment officer and chairman of TCW's multistrategy fixed-income committee, said he anticipated the mortgage crisis as early as 2006 and positioned the strategy to take advantage of the Federal Reserve Board slashing interest rates.
Mr. Gundlach said he rotated the portfolio from government credit into credit risk securities. “This (strategy) is up big because of the rotation into bombed-out credit at 50 cents on the dollar,” he said. He said the portfolio might face a tougher time in 2010, noting that “a lot of the credit rally we have seen is over.”
Mr. Gundlach also predicted that junk bond strategies will come out on top for calendar year 2010.
Delaware Investments, Philadelphia, took the No. 2 spot overall with 34.77% for its Long-Duration Fixed Income strategy. Portfolio manager Tom Chow said the strategy is heavily biased toward corporate risk and his team has been able to act quickly and decisively in turbulent markets.
During the height of the credit crisis, banks became unwilling to lend with one another and their average client base. “The market needed liquidity and investment-grade corporate risk was one of the few asset classes where you could achieve that,” Mr. Chow said.
He said 15 Delaware research analysts identified companies with “a maximum amount of operating flexibility.”
“One of the key characteristics of this strategy is its focus on investment-grade corporate securities with eight- to 11-year durations,” he said.
Dwight Asset Management, the Burlington, Vt.-based subsidiary of Old Mutual PLC, took the No. 3 spot in the overall returns for its high-yield strategy, which returned 34.19% for the year. Sean Slein, co-manager of the portfolio, said the strategy aims to maximize risk-adjusted returns using fundamental credit research.
He said the strategy relies primarily on “nuts-and-bolts old-fashioned credit analysis” in picking its investments.
“Our philosophy is one where essentially it gives us somewhat of a conservative bias because we're looking at spreads on a risk-adjusted basis; essentially we tend to be a little more contrarian,” Mr. Slein said. “As a result, we tend to be in a bull market before most other participants are, and we decrease our risk and take some chips off the table and become more conservative than the rest of the market.”