Long-duration bond strategies continuing its dominant ways

Long-duration bond strategies for the fifth consecutive quarter dominated the list of top-performing domestic fixed-income managers for the year ended Sept. 30, according to Morningstar Inc.'s separate account/collective investment trust database.

Long-duration strategies accounted for nine of the overall top 10 strategies for the year ended Sept. 30. The previous quarter, seven of the top 10 strategies were long-duration strategies.

The median return for the domestic fixed-income universe was 2% and the Barclays U.S. Government/Credit index returned 2.7% for the year ended Sept. 30.

Over the three- and 12-month periods ended Sept. 30, long-duration strategies returned a median 1.56% and 2.35%, respectively, slightly below the Barclay's U.S. Long Government/Credit index's returns of 2.18% and 3.09%, respectively.

Other fixed-income categories did not perform as well. Limited-duration fixed-income strategies returned a median 0.34% and 1.4% in the quarter and year ended Sept. 30, respectively, and domestic high-yield strategies returned a median -4.1% and -2.1%, respectively, over the same periods.

Long-duration strategies have been particularly volatile but picked up in the third quarter, said Sarah Bush, director of fixed-income strategies, manager research at Morningstar, Chicago.

“We clearly had a very big risk-off trade in the third quarter,” Ms. Bush said. “The dominant story we saw in the news was concern about growth in China, and another was the double dip in oil prices. Then obviously you saw the (Federal Reserve) back off and not move ahead with the rate hike. You look at the third quarter, you saw an amplification of the trends we saw for the whole year.”

As a result of the prolonged prominence of long-duration strategies, the top 10 consists mostly of familiar faces.

Ranking first is NISA Investment Advisors LLC's 15+ STRIPS strategy, which invests in zero-coupon securities with a maturity date of 15 years or more, with a one-year gross return of 11.76%.

It is the fifth consecutive quarter the 15+ STRIPS strategy has ranked either first or second in the overall fixed-income listings. In its first time in that stretch, the 15+ STRIPS strategy had a gross return of 20% in the year ended Sept. 30, 2014.

NISA's long-duration government-only consolidated strategy ranked third for the year ended Sept. 30, with a 10.43% gross return. A year ago, it ranked second, with a gross return of 16.7% in the year ended Sept. 30, 2014.

Both strategies hedge interest rate risk. In a previous interview, Jess B. Yawitz, CEO and chairman at St. Louis-based NISA, said the ongoing success of the strategies was due to the low-interest-rate environment.

Hoisington Investment Management Co.'s macroeconomic fixed-income strategy ranked second, with a gross return of 10.47% for the year ended Sept. 30.

Lacy Hunt, chief economist and executive vice president at Hoisington in Austin, Texas, said the strategy has the flexibility to select a duration based on market conditions.

“The driving force in the long bond as suggested by the Fisher Equation is the inflationary expectation,” Mr. Hunt said. “The inflationary trend is downward and we've been positioned in the long bond and it's done quite well for us for quite some time.”

Ranking fourth is State Street Global Advisors' long U.S. government bond index strategy, which returned a gross 8.61% in the year ended Sept. 30.

Lori Heinel, chief portfolio strategist for SSgA in Boston, said the success of the passive strategy is completely “linked to the continuing fact that long-term bonds offer a return premium over shorter-term bonds and the fact that you haven't seen capital losses due to rising rates.”

Despite the popular belief that the Federal Reserve finally will raise rates in December, Ms. Heinel said, “it will remain a pretty good performing asset class. We think long-term Treasuries are sort of anchored by yields in the rest of the world.”

Some examples Ms. Heinel gave were the U.K. and Japan. The 10-year U.K. gilt yield is currently 1.97%, while the 10-year Japanese bond yield is 0.31%, compared to the 10-year U.S. Treasury yields of more than 2%.

Rounding out the top five, Newport Beach, Calif.-based Pacific Investment Management Co.'s long-duration Treasury strategy returned a gross 8.33% in the year ended Sept. 30.

For the five years ended Sept. 30, the top performer was Atlantic Asset Management's enhanced stock indexing strategy, with an annualized gross return of 14.52%. The median annualized gross return for the entire domestic fixed-income universe for the five years ended Sept. 30 was 3.58% and the Barclays U.S. Government/Credit index, 3.09%.

The Atlantic strategy provides synthetic exposure to equity benchmarks by utilizing stock index futures and/or swaps. Its underlying assets consist of the manager's short-term bond portfolio, placing it in Morningstar's short-term bond category.

The rest of the top five domestic fixed-income managers in the five years ended Sept. 30 are: TCW Group's AlphaTrak strategy, with an annualized gross return of 14.44%; Pyramis Global Advisors' high-yield commercial mortgage-backed securities strategy, 11.06%; and TCW Group's opportunistic MBS and securitized opportunities strategies, 10.58% and 10.07%, respectively.

For collective investment trusts, BlackRock Inc.'s 20+ Treasury bond strategy ranked first, returning a net 9.15% in the year ended Sept. 30.

The median return for fixed-income collective investment trusts was 2.42% for the year ended Sept. 30.

The rest of the top five collective investment trusts were: SSgA's U.S. long government bond index CIT, which returned a net 8.72% in the year ended Sept. 30; BlackRock's long-term government bond index CIT, which returned a net 8.61%; BNY Mellon Investment Management's long-term government bond index CIT, 8.56%; and J.P. Morgan Asset Management's JPMCB long-duration investment grade, 5.31%.

All data for Pensions & Investments 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 Oct. 28; online rankings may differ. For information on the database, please contact separate [email protected] or call 312-384-4087.