High-yield bond strategies mostly dethroned long-term bond strategies for the year ended Sept. 30, according to the best performing fixed-income managers' rankings in the Morningstar Inc. separate account/collective investment trust database.
The entire top 10 for one-year returns is new, led by six high-yield strategies and two ultrashort bond portfolios. The entire top 10 was long bond portfolios the previous quarter with most of them holdovers from the first quarter. Long bond strategies still take up nine of 10 spots on the rankings for five-year returns.
“This is a huge departure from the trends seen (over the past year) when the top 10 was predominantly made up of long duration strategies,” said Diana Scott, product development manager, separate accounts, at Morningstar, Chicago. “The important story to see is high-yield strategies emerging pretty prominently this quarter.”
The main reasons for the change in strategies are an increased confidence in the bond market and investors' propensity to take on more risk, Ms. Scott said. In the third quarter, the Federal Reserve announced it will keep interest rates low into 2015 while European leaders showed more solidarity and commitment to the eurozone.
“All these issues came to play to create a more comfortable setting,” Ms. Scott said.
All broad fixed-income classes had a positive median return for the quarter ended Sept. 30 with a tightened spread between the highest and lowest performers. For the quarter, the highest return in the universe was 15.13% and the lowest, -2.1%. For the quarter ended June 30, the highest was 17.14% and lowest, -8.61%.
For the year ended June 30, the median strategy among all domestic fixed-income separate account portfolios returned 7.19%. The Barclays Government/Credit index returned 5.7% in the period, while the Credit Suisse High Yield index returned 17.92%.
Emerging markets fixed-income strategies had the highest median returns for the year ended Sept. 30 at 20.07%, but those strategies are not included in Morningstar's rankings, which only address U.S. strategies. Other strong performers for the year include high yield, 18.33%; convertibles, 15.51%; and long duration, 12.28%.
“Investors took more risk and the risk paid off,” Ms. Scott said.