Special Report

Intermediate-term bonds continue to top the list

Intermediate-term strategies stayed at the top of the list of top-performing domestic fixed-income managers for the year ended March 31, according to Morningstar Inc.'s separate account/collective investment trust database.

For the second consecutive quarter, intermediate-duration strategies accounted for six of the overall top 10 strategies for the year.

The median return for intermediate-term strategies was 1.98% and the Barclays U.S. Intermediate Aggregate Bond index returned 2.2% for the year ended March 31. The median return for the entire domestic fixed-income universe was 1.39% and the Barclays U.S. Aggregate Bond index returned 1.96% for the year.

Three of the top 10 overall were long-term strategies but the median return for the long-duration universe was only 0.4% for the year ended March 31.

There were only two holdovers from the previous quarter, both taxable municipal bond strategies: Templeton Financial Services Inc.'s taxable municipal intermediate bond strategy and Belle Haven Investments LP's Taxable PLUS.

“There was a lot of volatility. That was the biggest takeaway from the first quarter of 2016, and in 2015,” said Cara Esser, senior analyst of fixed-income strategies, manager research, at Morningstar in Chicago.

Ms. Esser said municipal bonds, which were less volatile than other non-Treasury sectors, performed well from a total return perspective for the year ended March 31. Four of the overall domestic top 10 were municipal bond strategies.

“Munis have been a pretty positive success story in recent months. A lot of that has to do with a supply and demand story that's pretty positive. You've got a healthy demand and a not so healthy supply,” she said.

Templeton Financial's taxable municipal intermediate bond strategy, with a one-year gross return of 5.76%, moved up to the top spot on the list from fourth place the previous quarter.

Federated Investors Inc.'s Alternative BearGlobal fixed-income composite, which includes both domestic and non-U.S. holdings, was second on the list with a one-year gross return of 5.17%. (Morningstar does not have a threshold for how much has to be in U.S. securities to be in the overall domestic category.)

John Sidawi, portfolio manager at Federated in Pittsburgh, said the liquid nature of the currency strategy keeps the BearGlobal portfolio nimble enough to respond to changing market conditions, while non-U.S. dollar diversification limits Treasury risk.

“If you only stick to U.S. assets, U.S. bonds, you're in effect ignoring 65% of the assets out there. Ignoring that never makes sense and looking outside the U.S. is something that all investors should do,” said Ihab Salib, Pittsburgh-based senior portfolio manager and head of the international fixed-income group at Federated.

Another Federated strategy, the non-U.S. unhedged fixed-income composite, ranked first among global bond strategies with a one-year gross return of 8.13%. The Citigroup non-U.S. World Government bond index returned 7.74% for the period.

Federated's global and international fixed-income strategies are driven by a three-tier quantitative and qualitative analysis of developed market holdings, which factors in duration, country selection, currency weighting and other key macroeconomic data, Mr. Salib said. Although the core tier of the analysis is long term, this view is moderated by medium- and short-term quantitative and qualitative inputs, he said.

“You have your core long-term belief and your structural bets, but you can't be so blind to what's happening around you to ignore the short term,” Mr. Salib said.

In third place for U.S. fixed-income strategies for the year was Cavanal Hill Investment Management Inc.'s Strategic Fixed Income, an opportunistic strategy that holds U.S. dollar-denominated bonds that are rated A or higher at the time of purchase. It had a gross return of 4.46%.

“The two main reasons the strategy outperformed its peers, net of fees, over the past 12 months is a large exposure to fixed-rate non-agency (mortgage-backed securities) and a large underweighting to the corporate sector,” said Russell Knox, vice president and fixed-income portfolio manager at Cavanal Hill in Tulsa, Okla.

Mr. Knox expects the corporate sector to continue to underperform and he said the strategy will look to expand its corporate holdings if spreads widen.

“We are allowed a lot of discretion in which sectors we overweight and underweight. So we have plenty of space to move when opportunities come. There is still good relative value in the non-agency sector,” he said.

Following closely behind Cavanal Hill on the one-year list, with a gross return of 4.45%, Belle Haven's Taxable PLUS strategy moved up to the fourth spot on the list from ninth place the previous quarter.

Brian Steeves, vice president and portfolio manager at Belle Haven in Rye Brook, N.Y., said Taxable PLUS is an income-oriented total return bond strategy that finds value in the relative price advantage of taxable municipal bonds as compared to similarly rated corporate issues.

“You're able to buy a taxable muni that's higher rated, with a much lower default rate, lower volatility and you're picking up higher yield,” he said.

Although the strategy was composed of about 70% taxable municipal bonds as of March 31, Mr. Steeves said portfolio managers retain the flexibility to move into different fixed-income sectors as opportunities arise, including agencies, Treasuries and corporate bonds.

“We don't have a target. We're looking for relative value or for sectors that we deem cheap. It depends on what's going on in the market and what's attractive,” Mr. Steeves said.

Rounding out the top five in the separately managed account overall ranking was Los Angeles-based DoubleLine Capital LP's Long Duration Total Return strategy, which returned a gross 3.96% for the year ended March 31.

Five-year returns

For the five years ended March 31, NISA Investment Advisors LLC's 15+ STRIPS and long-duration government-only consolidated strategies were in first and second place, with gross returns of 14.75% and 13.75%, respectively.

(Returns for all periods of more than one year are compound annualized figures.)

The Barclays U.S. Long-Government Bond index returned 9.52% for the five-year period.

“The strategic purpose of these mandates is to hedge interest rate risk that is inherent in pension liabilities. Over the past five years, rates have fallen and these strategies have performed well. While we are proud of our ability to add relative value to the chosen benchmarks, our clients and their advisers deserve most of the credit for choosing to reduce pension volatility via long-duration bonds,” said Jess B. Yawitz, CEO and chairman of St. Louis-based NISA.

TCW Group's AlphaTrak strategy, which had an annualized gross return of 12.15%, ranked third on the five-year list. The strategy has been among the top 10 for five-year performance since the fourth quarter of 2014.

“In a world where there's a passive vs. active debate, AlphaTrak comes in the middle,” said Bryan Whalen, group managing director, U.S. fixed income, at TCW in Los Angeles.

Mr. Whalen said the AlphaTrak strategy balances passive equity exposure to the S&P 500 through futures with active management of high-quality fixed-income holdings, including investment-grade corporate bonds, short-duration non-agency residential MBS, agency-backed commercial MBS, and other consumer credit and asset-backed securities.

“Regardless of the sector we're in, it's higher quality, lower volatility. We enhance the return through active fixed-income strategies in a safe, fairly conservative way,” Mr. Whalen said.

Austin, Texas-based Hoisington Investment Management Co.'s macroeconomic fixed-income strategy ranked fourth, with a gross return of 12.04% for the five years ended March 31, while Stamford, Conn.-based Hillswick Asset Management's long-duration government strategy, which returned 10.86%, ranked fifth.

The median annualized return for the domestic fixed-income universe for the five years ended March 31 was 4% and the Barclays U.S. Aggregate bond index returned 3.78% for the period.

Collective investment trusts

For the second consecutive quarter, Amalgamated Bank's ultra construction loan strategy led the collective investment trust universe, with a net one-year return of 8.57%.

The median return for fixed-income collective investment trusts was 1.38% for the year ended March 31.

J.P. Morgan Asset Management claimed the second and third spots in the top five. The JPMCB mortgage private placement and JPMCB mortgage-backed securities CITs had net returns of 3.98% and 3.13%, respectively.

Rounding out the top five for the year ended March 31 were State Street Global Advisors' U.S. long-government bond index CIT, with a net 2.86% return, and BNY Mellon Investment Management's long-term government bond index CIT with a net return of 2.73%.

All data for Pensions & Investments' top-performing managers report are provided from Morningstar's global separate account/ collective investment trust database. For information on the database, please contact separateaccounts@morningstar.com or call 312-384-4087.