For long duration, all signs point to continued strength

Long-duration bond strategies continued their dominance on the list of top-performing fixed-income managers, according to Morningstar Inc.'s separate account/collective investment trust database for the year ended June 30.

“Long-duration got a great boost when yields fell last year. When yields fall, they're going to do really well and when yields rise they're going to get hammered. That would apply to most of the funds here,” said Michael Herbst, director of manager research for fixed-income strategies at Morningstar in Chicago.

Seven of the top 10 fixed-income strategies in the separate account universe for the 12-month period were long-duration. The top 10 also included two strategies that Morningstar classifies as ultrashort, and with one high-yield bond strategy.

The median return for the domestic fixed-income universe was 1.6% and the Barclays U.S. Government/Credit index returned 1.7% for the year ended June 30. The median return for the long-duration universe for the same period was 1.7%.

Greystone Managed Investments Inc.'s long bond fund claimed the top spot on the one-year list, with a gross return of 9.8%.

“It certainly benefited from a long duration and Canadian exposure. The Canadian dollar rallied vs. the U.S. dollar the past quarter,” said Morningstar's Mr. Herbst.

NISA Investment Advisors LLC's 15+ STRIPS strategy, which invests in zero-coupon securities with a maturity date of 15 years or more, was in second place with a one-year gross return of 8.96%.

NISA's long-duration government-only consolidated strategy also made the top 10, ranking fourth for the 12 months with a 7.7% return.

“Of course the overwhelming majority of the return associated with these portfolios is related to their strategic purpose of hedging interest rate risk. As such, as rates have fallen generally over this period, the strategies have performed well and have helped to manage the plans' interest rate risk,” said David Eichhorn, St. Louis-based managing director, investment strategies, at NISA.

Hoisington Investment Management Co.'s macroeconomic fixed-income strategy was in third place for the fourth consecutive quarter, with a gross return of 8.8%. The strategy, which does not have a strict duration mandate, has held a long-duration Treasury position for the past year.

“We chose to be on the long end. We think there is great value on the long end of the curve and our view is that it will continue,” said Lacy Hunt, chief economist and executive vice president at Hoisington in Austin, Texas.

Rounding out the top five was TCW Group's AlphaTrak strategy with a return of 6.8%.

“It's not a traditional bond strategy. It's a little bit of a different animal,” said Bryan Whalen, group managing director, U.S. fixed income, at TCW in Los Angeles. “Investors get index exposure to the S&P, plus the additional benefits of us managing the cash within the low-duration high-quality fixed-income markets that offer attractive but safe spread advantages over just holding the cash.”

For the five years ended June 30, Western Asset Management Co.'s U.S. index-plus strategy was in first place with an annualized gross return of 19.4%. (All returns for periods of more than one year are compound annualized.)

TCW's AlphaTrak was in second place on the five-year list with a gross return of 18.9%.

Although WAMCO's index-plus and TCW's AlphaTrak are in Morningstar's ultrashort bond category, Mr. Herbst noted that both strategies contain equity components.

Pyramis Global Advisors LLC's high-yield commercial mortgage-backed securities strategy ranked third with a five-year gross return of 12.1%.

TCW's opportunistic mortgage-backed securities strategy and the manager's securitized opportunities approach were in fourth and fifth place, with gross returns of 12% and 11.7%, respectively. Both strategies are on Morningstar's five-year list for the fifth consecutive quarter, with the opportunistic MBS strategy appearing on consecutive five-year lists since the third quarter of 2011.

Mr. Whalen describes the securitized opportunities strategy as a more expansive version of the opportunistic mortgage-backed securities strategy. “Roughly 50(%) to 60% of the securitized opportunities strategy is allocated to the non-agency market. The OMBS focuses on the non-agency (residential MBS) market. We think the returns there are very attractive relative to other fixed-income classes,” he said.

Three of the top five strategies — Pyramis' high-yield CMBS, TCW's opportunistic MBS and TCW's securitized opportunities — on the five-year list had “significant” non-agency exposure, Mr. Herbst said. “Generally, most non-agency MBS and CMBS have done well over the trailing year. And you could say the same thing over the past three- and five-year periods,” he said.

The median return for the overall domestic fixed-income universe for the five years ended June 30 was 4%, and the Barclays Capital Government/Credit index returned 3.5%.

In the domestic fixed-income collective investment trust universe, BlackRock Inc.'s 20+ Treasury bond strategy ranked first with a one-year net return of 6.8%, followed by Amalgamated Bank's ultra construction loan strategy with a net return of 6.3%.

Rounding out the top five were State Street Global Advisors' long U.S. government index, BlackRock's long-term government bond index, and BNY Mellon's EB LT government bond index returning a net 6.26%, 6.24% and 6.15%, respectively.

The median return for domestic collective investment trusts for the year ended June 30 was 1.7%.

All of the data for Pensions & Investments' quarterly top-performing managers report are provided from Morningstar's global separate account/collective investment trust database. The rankings that run in print were pulled from Morningstar data available on July 23; online rankings might differ. For information on the database, please contact separate [email protected] or call 312-384-4087.