Long duration displaces high-yield bonds as top performers for year

Long-duration bond strategies accounted for every one of the 10 best-performing fixed-income managers for the year ended Dec. 31, according to Morningstar Inc.'s separate account/collective investment trust database.

“For long duration, you"ve had median returns which are quite a bit above all of the other categories,” said Nicholas Sundberg, Chicago-based data analyst separate accounts at Morningstar.

For the year ended Dec. 31, the median return for long-duration strategies was 17.77%. Limited- and intermediate-duration strategies had median returns of 1.28% and 5.55%, respectively. Domestic high yield had a median return of 2.35%.

For the full fixed-income universe, the median return for 2014 was 4.05% and the Barclays Government/Credit index returned 6.01%.

The second half of 2014 saw a dramatic change over the first half of the year. For the 12 months ended June 30, seven of the top 10 fixed-income strategies in the separate account universe were in Morningstar's high-yield bond categories.

“As a general rule, whatever is happening in investment-grade credit, that effect on steroids is what's happening in high yield,” said Jess B. Yawitz, chairman and CEO at St. Louis-based NISA Investment Advisors LLC. So since credit market returns in general were volatile, high-yield returns were especially volatile.

The one-year gross return of 42.92% for NISA's 15+ STRIPS strategy, putting it at the top of the overall fixed-income universe for the second consecutive quarter.

“Looking back to 13 months ago, there was a strong consensus that (Treasury) yields in the U.S. would rise significantly,” Mr. Yawitz said. “The big story is that not only didn't rates go up significantly, not only didn't they stay the same, they went down dramatically.”

Also benefiting from the decline in Treasury rates was NISA's long-duration government-only consolidated strategy, which ranked second for the year, its second consecutive quarter in that position. Its one-year gross return was 35.52%.

Both the NISA strategies also were among the top five domestic strategies for 2014 in Morningstar's universe.

The macroeconomic fixed-income strategy of Austin, Texas-based Hoisington Investment Management Co. was in third place on the one-year rank, retaining that ranking for the second consecutive quarter, with a gross return of 33.13%. Fourth for the year was New York-based Ryan Labs Inc.'s long government strategy, with a one-year gross return of 25.82%.

Daniel J. Ivascyn, Newport Beach, Calif.-based managing director and group chief investment officer at Pacific Investment Management Co. LLC, noted the impact of broader market on the top 10 shift to long-government strategies, from high yield, during 2014.

“The last quarter, as oil continued to drop, we witnessed (the) spread widening across the credit sectors. Higher-quality, long-duration strategies tend to do better when people are concerned about growth,” Mr. Ivascyn said.

PIMCO's long-duration Treasury strategy, with a one-year gross return of 25.1%, was fifth on the list for the year ended Dec. 31.

Median returns for global and emerging markets fixed-income strategies were 2.26% and 1.44%, respectively, for the year ended Dec. 31. The Citigroup Non-U.S. World Government Bond index returned -2.68% for the period.

For the five years ended Dec. 31, five strategies from the previous quarter dropped from the list, all categorized by Morningstar as high yield.

“The biggest change is that high yield has declined. They had a tough second half of the year and that's why we've seen quite a few of them drop off the top five-year list from last quarter to this quarter,” said Mr. Sundberg.

As of Dec. 31, Western Asset Management Co.'s U.S. Index-Plus strategy was in first place on the five-year ranking with an annualized gross return of 18.93%. (All returns for periods of more than one year are compound annualized.)

In second place on the five-year list, with a gross return of 18.12%, was TCW Group's MetWest AlphaTrak, which Morningstar classifies as ultrashort fixed income but TCW considers primarily an S&P 500 futures strategy.

“Basically, through the use of S&P futures and opportunistic investments of the cash in the strategy, we try to outperform the S&P index. While a good deal of liquidity is held in cash, a good amount is held in fixed income,” said Bryan T. Whalen, group managing director, U.S. fixed income, at Los Angeles-based TCW Group. “The majority of that return is coming from the S&P index. We wouldn't categorize that as an apples-to-apples comparison to our other two strategies (on the top 10 list). The other two solely invest in the fixed-income markets,” Mr. Whalen said.

The two other TCW strategies in the top 10 for the five years ended Dec. 31 were TCW's securitized opportunities strategy in fifth place and TCW's opportunistic mortgage-backed securities strategy in sixth, with gross returns of 14.19% and 14.06%, respectively. Both strategies are on Morningstar's five-year list for the third consecutive quarter, with the opportunistic MBS strategy appearing on the list since the third quarter of 2011.

NISA's 15+ STRIPS was in third place for the five years, with a gross return of 15.07%; and the firm's long-duration government-only consolidated strategy was in seventh, with 14.03%.

The median return for the overall domestic fixed-income universe for the five years ended Dec. 31 was 4.98%, and the Barclays Capital Government/Credit index returned 4.69% for the period.

In the commingled universe, Wells Fargo's liability-driven solution CIT III F fund led the overall domestic collective investment trust rankings, with a one-year net return of 34.99% as of Dec. 31. State Street Global Advisors' long U.S. government index and Mellon Capital Management Corp.'s EB LT government bond index followed, both with one-year net returns of 24.61%. Wells Fargo's liability driven solution CIT II F strategy's one-year net return of 20.16% earned fourth place. Ryan Labs' long government/credit fund was in fifth place, with a net return of 19.97%.

The one-year median return for collective investment trusts was 5.16%.

Strategies from J.P. Morgan Asset Management occupied four of the top five positions on the five-year CIT list. The JPMCB extended duration fund topped that list, with an annualized net return of 10.3%; closely followed by JPMCB long credit in second place and JPMCB long-duration investment grade in third, with annualized net returns of 10.27% and 10.24%, respectively; while JPMCB extended duration sector was in fifth place, with an annualized net return of 10.13%. Wells Fargo's liability driven solution CIT II F was in fourth place, with an annualized net return of 10.2%.

The median annualized return for collective investment trusts for the five years ended Dec. 31 was 4.52%.

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