Long-term bond strategies once again swept the best-performing fixed-income managers' ranking in the Morningstar Inc. separate account/collective investment trust database.
All 10 of the top-performing separate account strategies in the overall universe for the year ended June 30 were long bonds, making long-term strategies the top earners for the fourth straight quarter. Nine of the top 10 also appeared on the list the previous quarter, while the top three remained exactly the same.
“From the makeup of the top 10, there's obviously not much turnover,” said Diana Scott, data analyst at Chicago-based Morningstar Inc. “It's completely dominated by long-term bonds and long-term government.”
The lack of turnover among the leaders can be attributed to the current economic environment; when interest rates are low, bond values are higher. Although Ms. Scott said long-term bonds can be risky, she also pointed out they can produce strong returns when interest rates remain low.
“Long-duration strategies are clearly benefiting in what is considered a dismal and volatile market,” Ms. Scott said. “We know that the European sovereign debt crisis is on the forefront of everyone's minds, so it's almost obvious that investors seek safer mechanisms in fixed-income vehicles.”
For the year ended June 30, the median strategy among all domestic fixed-income separate account portfolios returned 7.01%; in the long-duration universe, the median for the 12 months was 20.88%. The Barclays Government/Credit index returned 8.79% in the period, while the BarCap Long Government/ Credit index returned 24.58%.
“When I see the headlines, it's easy to think everything did poorly,” Ms. Scott said. “But when looking at the numbers, it's interesting and informative to separate the emotional and headline-type issues and realize not everything is negative. There are some spaces in the economy for positive growth.”
The top two strategies in the overall universe belonged to St. Louis-based NISA Investment Advisors LLC. On top for the third straight quarter was the NISA 15+ STRIPS portfolio, with a one-year gross return of 57.3%. The strategy — which invests in Treasury STRIPS and zero-coupon securities that don't mature for at least 15 years — also finished fourth in five-year returns with an annualized 16.59%
The NISA long-duration government-only consolidated strategy was second, with a one-year gross return of 55.87%. The strategy also took the fifth spot on the five-year return list with an annualized 16.37%.
“While we are pleased with our performance relative to the chosen benchmark, the absolute performance of our long-duration accounts is a testament to our clients identifying the key role fixed income can play when managing the interest-rate risk inherent in pension liabilities,” said David Eichhorn, director of investment strategies at NISA, in an e-mailed statement. “Our clients continue to utilize long-duration strategies as the cornerstone of their interest-rate risk management strategies.”
NISA had a third strategy in the top 10; its long-duration government/credit consolidated portfolio ranked ninth with 29.7%.