Things were looking up for domestic fixed-income managers, judging by the Morningstar rankings for the year ended June 30.
In fact, the quarter that ended June 30 is the first since the first quarter of 2009 that the median return for domestic fixed-income separate accounts — 2% — has been higher than the equity counterpart, at 0.01%, said Adam Baranowski, a data analyst with Morningstar Inc., Chicago.
For the 12 months, the median domestic fixed-income return in Morningstar's separate account/collective investment trust database was 4.81%. By contrast, the Barclays Capital Government Credit index had a one-year return of 3.68%.
Also notable for the year, said Mr. Baranowski, is that high-yield strategies held six of the top 10 spots. “It's showing that strategies with lower average credit quality are doing well,” he said.
Despite that strength, the top four performers were not high-yield strategies.
In fact, three of the top five were futures-based enhanced indexing strategies: Western Asset Management LLC's U.S. Index Plus, ranked second with a gross return of 38.07%; TCW Group Inc.'s MetWest AlphaTrak with a gross return of 36.2,%, was third; and Atlantic Asset Management LLC's Enhanced Stock Indexing came in fourth with a 33.84% return.
Stephen M. Kane, Los Angeles-based MetWest group managing director and portfolio manager, said the AlphaTrak portfolio is a short-term strategy designed to outperform the S&P 500 stock index. The portfolio's “concentration in non-agency mortgage securities and investment-grade corporate (bonds) has been working very well. The most significant position has been 24% in old subprime mortgages. We scooped in and bought them at deep discounts and still feel they offer good value. Over the past one year and three years, it has been a significant yield advantage, given the Fed has driven short-term rates so low. What's given it a real kicker in the last few years has been a significant decline in risk premium.”
Looking ahead, Mr. Kane said, “We're positioned for a continued lowering on yield spreads in non-agency mortgages. We think not only will we collect that premium but it will come down.” The recent flurry of rate volatility “hasn't really hurt the strategy much,” he added.