Long-duration strategies accounted for every spot in the top 10 overall domestic fixed-income rankings for the year ended June 30, according to Morningstar Inc.'s separate account/collective investment trust database.
The domination by long-duration strategies for the year was an abrupt change from the two previous quarters. For the year ended March 31, intermediate-term strategies accounted for six of the top 10 spots.
Not a single strategy from last quarter's top 10 remains.
Emory Zink, Chicago-based fixed-income analyst at Morningstar, Chicago, said while many experts thought interest rates would rise in 2016, “they're not going to hike any time soon.”
That is resulting in many investors choosing longer-duration securities, she said. Plus, yield curves are flattening, she added.
“Especially given all the political risk and the crazy things that have been happening, a lot of other governments will want” to invest in long-duration Treasuries, Ms. Zink said. “U.S. long-duration Treasuries are very attractive because you can't find yield in a lot of other places.”
The median return for long-duration strategies was 15.09% and the Barclays U.S. Long Government/Credit Bond index returned 15.72% for the year ended June 30. The median return for the entire domestic fixed-income universe was 4.37% and the Barclays U.S. Aggregate Bond index returned 6.7% for the year.
Of the top 10 overall domestic fixed-income strategies, NISA Investment Advisors LLC took three spots, including the top two for the 12 months.
The manager's 15+ STRIPS strategy topped the overall list with a gross return of 28.98% for the year ended June 30.
Jess B. Yawitz, CEO and chairman at St. Louis-based NISA, said in an e-mail, “The strategic purpose of the 15+ STRIPS portfolios is to use the longest duration physical instruments available (15 and longer maturity zero-coupon STRIPS) to hedge the interest rate risk that is inherent in pension liabilities. Many of our clients prefer STRIPS over coupon-bearing Treasuries because they can hedge a larger portion of the liability without having to increase the allocation to fixed income or use derivatives.”
The 15+ STRIPS strategy was followed by NISA's Long-Duration Government-Only Consolidated strategy, which returned a gross 24.41%. The two strategies also took the top two spots for the five years ended June 30, with annualized gross returns of 15.95% and 14.54%, respectively.
For the year ended June 30, NISA's Long-Duration Government/Credit Consolidated strategy ranked 10th with a gross return of 17.03%. That strategy also ranked seventh for the five years ended June 30, with 10.52%. (All returns for periods of more than one year are compound annualized figures.)
“The overwhelming majority of the return associated with these portfolios is related to their strategic purpose of hedging interest rate risk,” added David Eichhorn, managing director, investment strategies at NISA, in an e-mail. “As such, as rates have fallen generally over this period, the strategies have performed well.”
Mr. Yawitz noted the overall strength of long-duration strategies as a whole was the result of a number of factors, beginning with the falling of 10-year and longer Treasury rates about 30 basis points in the quarter and the tightening of long-maturity credit spreads of about five to 10 basis points in the three months.
“Much of the Treasury rate move occurred after the late June U.K. referendum and downward pressure on U.S. rates came from overseas, as yields there fell to historically low levels. With long maturity German and Swiss debt trading with negative yields, long-dated Treasuries looked 'cheap' to some investors,” Mr. Yawitz said.
Hoisington Investment Management Co.'s macroeconomic fixed-income strategy ranked third, with a gross return of 21.29% in the year ended June 30.
Lacy Hunt, chief economist and executive vice president at Hoisington in Austin, Texas, said in a telephone interview that “basically, we're duration managers.”
“We can have duration wherever we want on any of the Treasury curves,” Mr. Hunt said.
“Our view has been for quite some time the U.S. economy is in a disinflationary pattern and the risk of deflation is greater than inflation,” which is why, Mr. Hunt said, Hoisington works in a “portion of the curve that most people will not touch.”
“We've been carrying for quite some time now a 20-year duration and I think one of our big themes that has been part of our macro strategy for a very long time is that the U.S. economy is likely to consistently underperform relative to its historic pattern,” Mr. Hunt said.
Ranked fourth overall was Hillswick Asset Management LLC's long-duration strategy, which returned a gross 20.8% in the year ended June 30.
Mark McDonnell, president, chief operating officer and senior portfolio manager of Stamford, Conn.-based Hillswick, said in a telephone interview that the firm takes a macroeconomic approach.
“If you wanted to identify what worked, what we would attribute to the performance, it was taking a top-down view and deciding that the world is not quite as healthy as the markets were pricing,” Mr. McDonnell said
Mr. McDonnell said that decision was made in mid-2015.
“One key driver ... in terms of the technical would be that central banks are taking out on the order of $200 billion a month in duration and what that means to us is that the U.S. can have growth expectations, have different inflation expectations than some of the less healthy countries of the developed world; while it still yields more, it's not going to yield significantly more than those countries,” Mr. McDonnell said.
Rounding out the top five for the year ended June 30 was the long-duration Treasury strategy of Pacific Investment Management Co., with a gross return of 19.52%.
Overall for the five years ended June 30, the rest of the top five strategies following NISA's 15+ STRIPS and long government-only strategies, were: TCW Group's AlphaTrak strategy, which had an annualized gross return of 12.92%; Hoisington's macroeconomic fixed-income strategy, at 12.86%; and Hillswick's long-duration government strategy, at 11.71%.
In the domestic collective investment trust universe, BlackRock Inc. led the top five, with its 20+ Treasury bond CIT returning a net 20.41% in the year ended June 30, followed by State Street Global Advisors' long U.S. government index CIT, with a net 19.05%.
The median for overall domestic fixed-income managers in the CIT universe was 4.84% for the year ended June 30.
The rest of the top five were: BlackRock's long-term government bond index CIT, which returned a net 19.02% in the year ended June 30; BNY Mellon Investment Management's long-term government bond index CIT, which returned a net 18.92%; and Fidelity Institutional Asset Management's long corporate pool CIT, which returned a net 16.05%.
