Long-duration bond strategies led the list of top-performing fixed-income managers for the year ended Sept. 30, according to Morningstar Inc.'s separate account/collective investment trust database.
The third quarter “was quite a shake-up,” said Nicholas Sundberg, Chicago-based data analyst at Morningstar Inc.
“Only one (strategy) managed to stay on the (one-year) list: Pacific Investment Management Co.'s Long-Term Bond — Long Credit strategy,” he said.
All 10 leaders in the overall domestic fixed-income universe for the most recent 12 months were long-duration strategies; for the five years ended June 30, seven of the top 10 were high-yield bond strategies. In fact, high-yield bonds had dominated the rankings for eight straight quarters.
Falling high-yield third-quarter returns contributed to the change, Mr. Sundberg said. Domestic high-yield bonds in Morningstar's universe returned a median -1.79% in the quarter, down from 2.42% in the second quarter and 3.01% in the first quarter, respectively. The Credit Suisse High Yield index returned -1.79% for the third quarter.
Limited-, intermediate- and long-duration strategies “all managed to stay positive” in the third quarter but were down from previous quarters, Mr. Sundberg said. The third quarter “was the most volatile of the year,” he said. “Almost every asset class had a difficult time.”
Long-duration bonds in Morningstar's universe returned a median 0.77% in the third quarter, down from 4.74% and 6.29% in the second and first quarter, respectively.
The median return for the overall domestic fixed-income universe for the year ended Sept. 30 was 4.47%. The Barclays Capital Government/Credit index returned 4.08% for the period.
NISA Investment Advisors LLC's 15+ STRIPS strategy, which invests in zero-coupon securities with a maturity date of 15 years or more, and NISA's long-duration government-only consolidated strategy ranked first and second for the year, with gross returns of 20% and 16.7%, respectively.
The purpose of the strategies is to manage the interest rate risk in pension liabilities, said Jess B. Yawitz, CEO and chairman at St. Louis-based NISA. Mr. Yawitz attributed the strategies' success to the current low interest rate environment. “Interest rates have come down dramatically” year to date, Mr. Yawitz said. “Long duration (bonds) are going to get tremendous returns during that environment.”
Following NISA on the one-year list was Hoisington Investment Management Co.'s macroeconomic fixed-income strategy with a gross return of 15.4%.
The strategy tries to capture the inflationary expectation component of risk-free, long-term Treasury rates, said Lacy Hunt, chief economist and executive vice president at Austin, Texas-based Hoisington. “We try to make the correct duration expectation based on inflation expectations,” Mr. Hunt said.
Currently, the strategy is invested in long-duration Treasuries because the inflation rate and expectations are trending down, Mr. Hunt said. Mr. Hunt predicts this trend will continue into 2015 and perhaps beyond.
Rounding out the one-year list for the year ended Sept. 30 was PIMCO's long-term bond - long credit strategy and Standish Mellon Asset Management LLC's long duration multisector return-seeking strategy with gross returns of 14.9% and 14.6%, respectively.