High-yield strategies were the top performers in fixed income for the year ended Dec. 31, according to Morningstar Inc.'s separate account/collective investment trust database.
Eight of the top 10 fixed-income strategies in the separate account universe for the 12-month period were in Morningstar's high-yield bond category, a dramatic change from the year ended Sept. 30 in which long-duration strategies occupied eight of the top 10 spots.
The Credit Suisse High Yield index returned 18.39% for the year ended Dec. 31, the median domestic high-yield fixed-income return was 14.21% and the median return for the entire domestic fixed-income universe was 3.18% for the period.
“In early 2016, there were stories about the price of oil plummeting that forced a sell-off. Following the resolution of that, high yield started an aggressive comeback,” said Emory Zink, fund analyst, fixed-income strategies at Morningstar in Chicago.
Ms. Zink said 2016 was a “risk-on year” in which high-yielding sectors performed well. In the same period, longer-duration bonds became less attractive as many managers began to expect more frequent interest rates increases, she said.The Bloomberg Barclays U.S. Long Government/Credit Bond index returned 6.67% for the year ended Dec. 31 and the median return for long-duration strategies was 6.98% for the one-year period.
“It's an interesting time to be a bond investor,'' Ms. Zink said. “With the new presidential administration, there are a lot of potential changes that could happen. Changes to the corporate tax rate, infrastructure spending, and relationships with global trading partners could affect where the opportunities are in the market.”
MacKay Shields LLC's select high-yield composite claimed the top spot on the one-year list with a gross return of 26.27%.
The strategy holds about 100 issues in “a concentrated portfolio of higher yielding corporate bonds,'' said Andrew Susser, portfolio manager and head of the high-yield division at MacKay Shields in New York. “As of Dec. 31, the portfolio's exposure to CCC-rated credit was higher than that of the broader high-yield market.”
While many investors were avoiding the energy and metals and mining sectors in early 2016, during a time of commodities market stress, Mr. Susser said the select high-yield strategy added issues that the firm believed were trading at “significant discounts to their long term.''
The strategy, he said, also focused on 'fallen angels' in the commodity sectors, purchasing bonds at attractive prices.
Philadelphia-based Penn Capital Management Co. Inc.'s distressed total return strategy was second with a one-year gross return of 23.31%.
Nuveen Asset Management LLC's high-yield strategy was third, with a gross return of 22.82%.
Focusing more on credit risk than interest-rate risk, the strategy buys across the high-yield spectrum from below CCC to BB, while being overweight in B and CCC, said Nuveen's Jeffrey T. Schmitz, vice president and portfolio manager, high-yield credit, who is based in Minneapolis.
“CCC have outperformed dramatically and are likely to continue to perform well, given strong fundamentals, so we'll remain overweight fairly noticeably,” Mr. Schmitz said.
TCW Group Inc.'s AlphaTrak strategy ranked fourth for the 12 months ended Dec. 31 with a gross return of 21.67%. The strategy also topped the list of top performers for the year ended Sept. 30.
Morningstar classifies AlphaTrak as ultrashort fixed income but TCW considers it an enhanced equity indexing strategy.
Steve Kane, group managing director and generalist portfolio manager in the fixed-income group at TCW in Los Angeles, said “the strategy seeks to add alpha relative to the S&P 500 index by using S&P 500 futures to get index exposure and actively manages the collateral backing the futures using short-term fixed-income securities to enhance returns above the S&P 500 index.”
AlphaTrak's fixed-income component is diversified across bond issues including Treasuries, short-term corporate bonds, asset-backed securities, and agency and non-agency mortgage-backed securities. Mr. Kane said about 15% of AlphaTrak's fixed-income allocation is invested in non-agency MBS, which drove much of the strategy's return for the year.
“The economy has been strong,'' Mr. Kane said. “The housing market has recovered. The payments that these borrowers are paying are increasingly going to principal. When the loans are being paid down, there's a much lower likelihood of default. This has been a very powerful force.”
Logan Circle Partners LP's high-yield strategy rounded out the top five with a gross return of 20.08% for the period.
The strategy took advantage of price dislocations in the energy exploration and production sector early in 2016, when many investors were wary of the risk of lower-rated commodities, then capitalized when energy markets stabilized and prices adjusted later in the year, said Timothy L. Rabe, senior portfolio manager and head of high yield at Logan Circle in Philadelphia.
The strategy primarily holds BBB- through CCC-rated issues across a range of sectors, including energy, technology, telecommunications and media.