High-yield bond strategies continued to dominate the top fixed-income managers' ranking for the year ended Dec. 31, according to Morningstar Inc.'s separate account/collective investment trust database.
Six of the top 10 in the one-year returns were high-yield bond strategies; the rest were ultrashort, short, intermediate and long-term bond strategies.
Long-term bonds had dominated the rankings for four straight quarters but were overtaken by high-yield strategies in the year ended Sept. 30.
“Last quarter, high yield was starting to crawl in, mostly at the bottom,” said Andy Kwon, a data analyst at Chicago-based Morningstar. “But now when you look at the most recent quarter, most of the top five are high yield.”
The shift toward high yield can be attributed to low interest rates and investors willing to take on more risk in favor of greater returns.
“The fixed-income market hasn't really provided much return to investors due to the economy and interest rates,” Mr. Kwon said. “So if people are looking to make a decent return, they're going to have to make more risky investments. Long-term bonds just aren't able to outperform high yields, but that doesn't mean high yields are for everyone. They are riskier.”
Even though high yield first began to dominate in the previous quarter, most of the top-performing managers for the year ended Dec. 31 were newcomers to list; only three strategies also appeared in the top 10 rankings for the year ended Sept. 30.
“I think that idea of having more risk and having a higher return is playing a big part in the market,” Mr. Kwon said.
For the year ended Dec. 31, the median return among all domestic fixed-income separate account portfolios was 6.32%; in the high-yield universe, the median return for the 12 months was 15.25%. Meanwhile, the Barclays Government/Credit index returned 4.82% in the period, and the Credit Suisse High Yield index return returned 14.71%.
Although median returns were positive, Mr. Kwon suspects they might start to dip into the negative side in 2013.
“July was the highest median, and it started to slide down from there,” Mr. Kwon said of 2012. “It's hard to say if the trend will remain, but we might see it start to go to the negative side.”