High-yield strategies once again dominated the domestic fixed-income rankings of top-performing managers for the year ended June 30, according to Morningstar Inc.'s separate account/collective investment trust database.
For the second quarter in a row, nine of the top 10 fixed-income strategies in the separate account universe were in Morningstar's high-yield bond category for the 12-month period. It also was the third straight quarter dominated by high-yield strategies; eight of the top 10 in the year ended Dec. 31 were high yield.
High yield also ruled the five-year rankings, with eight of the top 10 domestic fixed-income strategies for the five years ended June 30.
The Credit Suisse High Yield index returned 13.04% in the year and an annualized 6.74% in the five years ended June 30. The median domestic high-yield return in the Morningstar universe was 11.49% for the year and an 6.74% in the five-year period. All multiyear returns are annualized.
The median return for the entire domestic fixed-income Morningstar universe was 0.93% for the year ended June 30 and 2.81% for the five-year period.
Emory Zink, fund analyst, fixed-income strategies at Morningstar in Chicago, said in a telephone interview that first-quarter themes continued into the second. The Federal Reserve had raised rates in March and did so again in June. Still, despite higher rates, the yield curve continued to flatten.
"That was kind of expected," Ms. Zink said. "When you have that flattening, investors had already priced in expectation for rate rises, so there wasn't a drastic move at the long end of the curve."
The Federal Open Market Committee agreed on June 14 to increase the federal funds rate by 25 basis points to a 1% to 1.25% range, echoing moves made in March and December 2016 that also raised rates by 25 basis points each.
Despite the supremacy of high-yield strategies, the top-ranked manager in the domestic fixed-income category for both the year and five years ended June 30 was in Morningstar's ultrashort bond category.
TCW Group Inc.'s AlphaTrak strategy returned a gross 26.93% in the 12 months and 17.26% in the five years ended June 30.
It was the second quarter in a row that the AlphaTrak strategy lead the one-year gross returns of domestic fixed-income managers.
"It is basically a fund that is involved in something that used to be referred to as portable alpha," said Tad Rivelle, chief investment officer of fixed income and fixed-income portfolio manager at Los Angeles-based TCW Group, in a telephone interview. "It's a portfolio of S&P 500 futures that provides index tracking to the S&P."
"It uses the exposure to the S&P 500 and the return of that," he said. "However, there's a very interesting element with the respect to the use of S&P futures. It means unlike when you buy a portfolio of the 500 stocks in the physical form, in the futures form you are engaged in a transaction where you have delayed delivery, so you have to only put an initial 3% margin down. With the 97% you didn't otherwise use, we deploy it to use as short-term (fixed-income) securities."