High-yield strategies were again the top performers in fixed income for the year ended March 31, according to Morningstar Inc.'s separate account/collective investment trust database.
Nine 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, continuing a trend from the year ended Dec. 31, when high-yield strategies occupied eight of the top 10 spots.
Long-duration bond strategies dominated Morningstar's list for the first three quarters of 2016 but long duration gave way to “risk-on” strategies at the end of 2016 as the energy sector recovered and fixed-income managers began to expect more frequent federal funds rate increases, said Emory Zink, fund analyst, fixed-income strategies at Morningstar in Chicago.
“The Federal Reserve raised rates in late 2016 and again in March, but the yield curve actually flattened in that period, which indicates a lot of investors already expected those rate moves. It was already priced in,” Ms. Zink said.
On March 15, the Federal Open Market Committee increased the federal funds rate by 25 basis points to a 0.75% to 1% range, echoing a Dec. 15 move that also raised rates by 25 basis points.
The recovery in energy prices was also a contributing factor in high yield's second consecutive quarter of dominance, Ms. Zink said. “In the fourth quarter of 2015 and first quarter of 2016, there was a lot of energy stress. One of the reasons high yield looks attractive (in the first quarter of 2017), energy has recovered and the energy names have continued to outperform from the previous quarter,” she said.
Ms. Zink said there was some uncertainty in market sentiment during the first months of 2017, following new legislative priorities in the U.S. that accompanied the election of a new president, but “a lot of managers are taking a 'wait-and-see' approach. They have expressed an expectation of volatility but volatility equates to opportunity. They're calculating risks and remaining open to a gamut of possible positions,” Ms. Zink said.
The Credit Suisse High Yield index returned 17.4% for the year ended March 31, the median domestic high-yield return was 13.81% and the median return for the entire domestic fixed-income universe was 1.6% for the period.
TCW Group Inc.'s AlphaTrak strategy claimed the top spot on the one-year list with a gross return of 27.61%. AlphaTrak was in fourth place for the year ended Dec. 31.