While high-yield strategies dominated the top 10 for both one- and five-year returns, the No. 1 positions remained the same for the second consecutive quarter — Brookfield Investment Management Inc.'s commercial mortgage-backed securities composite remained first for one-year gross returns at 32.07%, nearly 11 percentage points higher than the second place strategy; and TCW Group Inc.'s securitized opportunities portfolio held on to the top spot for five-year returns at 22.82% annualized. (All figures are gross returns, and returns of more than one year are annualized.)
Brookfield's strategy also ranked second for five-year returns at 18.02%.
“We look at things with upside because access to credit has been and continues to be limited,” said Michelle Russell-Dowe, managing director, head of structured products at New York-based Brookfield.
Ms. Russell-Dowe said the scale of the portfolio allows it to consistently be selective, especially as prices increase in the commercial real estate market. Generally, the strategy takes more credit risk and is duration neutral, she added.
“The direction of interest rates has been one of the more difficult things to anticipate,” Ms. Russell-Dowe said. “We want to hide in places away from interest rates. Credit has been a decent hiding place.”
In second place for one-year returns was the TCW MetWest AlphaTrak ultrashort strategy at 21.18%. Morningstar classifies it as an ultrashort bond strategy, but it is essentially an S&P 500 futures strategy, said Bryan Whalen, managing director, U.S. fixed income in Los Angeles. The underlying cash invests in non-agency mortgage-backed securities and has less exposure to a credit widening event, Mr. Whalen said.
Similar to the AlphaTrak strategy was third-place Western Asset Management Co.'s U.S. index plus strategy, which returned 20.79% for the year. The strategy consists of a synthetic index component that uses derivates for exposure to equity, and a short-duration bond component to add value while minimizing the risk.
Rounding out the top five for the year were Morgan Stanley Investment Management's global high yield strategy, at 15.18%, and DuPont Capital Management's high yield portfolio at 15.08%.
Morgan Stanley's strategy focuses on middle-market high-yield opportunities with $1 billion or less in outstanding debt. The strategy has largely focused on bonds rated B or CCC with an underweight on BB bonds, said Richard Lindquist, managing director, global head of high yield in New York.
“Generally, in our opinion, middle-market names are rated lower than they should be and provide opportunities,” Mr. Lindquist said.
In 2012, CCC bonds returned 18.34% compared to BB and B bonds that returned 14.59% and 15.53%, respectively. Through Sept. 30 of this year, CCC bonds returned 11.5%, compared to 4.33% for BB bonds and 5.99% for B bonds.
“We have found that historically when you isolate middle markets, they have the potential to outperform even more,” Mr. Lindquist said. “This year, it's even more stark of a comparison.”
The strategy mainly holds bonds that mature in 5½ to 8 years. “Inside five years, we expect spreads to collapse with so many (investors) going to short-duration bonds, and prices go up,” Mr. Lindquist said.
For the five years ended Sept. 30, eight of the top 10 strategies were holdovers from the last quarter, including two TCW strategies — securitized opportunities, first at 22.82%, and opportunistic MBS, seventh at 15.61%. The opportunistic MBS strategy also ranked seventh for one-year returns at 13.29%.
The securitized strategy “gives us the most opportunities” and has the “ability to dial up and down risk,” Mr. Whalen said. It invests in MBS, ABS and CMBS. About half of the portfolio now is in non-agency MBS, where the volatility is lower. The strategy really has increased investments in asset-backed securities, which make up about 35% of the portfolio compared with nearly zero two years ago.
Mr. Whalen said the duration in the portfolio continues to decrease and is positioned defensively as credit spreads tighten. “Our powder is relatively dry, so we can make concentrated moves into wherever distress lies,” he said.
In third place for the five years behind Brookfield's CMBS composite was First Eagle Investment Management's high-yield strategy, which returned an annualized 16.56%. The strategy looks at non-price factors such as what the proceeds of the bond issuance are used for, whether the company pays dividends and governance structure, as well as looking at overall spreads and default rates.
“We want to be able to analyze companies on a fundamental basis and minimize the factors out of our control,” said Ed Meigs, New York-based co-portfolio manager for the strategy.
The strategy focuses mainly on B and BB bonds as well as CCC bonds that have the characteristics of a B, Mr. Meigs said. Since 2009 and 2010, the portfolio has taken on more credit risk. Floating-rate banks loans make up 20% of the portfolio, up from just 2% in the summer of 2012.
“As spreads tighten, we gradually transition to a higher quality high-yield portfolio,” said Sean Slein, co-portfolio manager. “If we're not getting paid incrementally (for the risk taken), essentially we hide with higher quality high-yield names ... you win by not losing in many cases, especially in high yield.”
Rounding out the top five were Nomura Corporate Research and Asset Management Inc.'s high-yield total-return institutional portfolio at 16.27% and Reams Asset Management Co. LLC's long-duration fixed-income portfolio, 16.21%.
For collective investment trusts, Amalgamated Bank's ultra construction loan strategy was first for the second straight quarter, with a one-year return of 9.98%. Following that was Neuberger Berman's high-yield bond fund at 7.5%.
Rounding out the top five were Pyramis Global Advisors LLC's leveraged loan pool strategy with 7.07%; Goldman Sachs Asset Management's U.S. core-plus fixed-income strategy at 6.93%; and Wellington Management Co. LLP's high-yield bond strategy at 6.53%.
The median return among CITs for the year ended Sept. 30 was -0.66%. For the five years, the median return was 5.92%, slightly outpacing the Barclays Capital Government/ Credit index return of 5.7%.
All of the data for Pensions & Investments' quarterly Top Performing Managers report are provided from Morningstar's global separate account/collective investment trust database. For information on the database, please contact [email protected] or call 312-384-4087. n
