High-yield bond strategies led the list of top performers in fixed income for the year ended March 31, according to Morningstar Inc.'s separate account/collective investment trust database.
Half of the top 10 fixed-income strategies in the separate account universe were in Morningstar's high-yield bond categories. This follows long-duration strategies as the top performers in fixed income for the year ended Dec. 31. The first three quarters of 2017 also were highly represented by high-yield strategies.
Emory Zink, fund analyst, fixed-income strategies at Morningstar in Chicago, said recent interest-rate policies by the Federal Reserve are having more of an effect than in prior months. The Fed raised rates by 25 basis points in March to 1.5% under new Chairman Jerome H. Powell.
"So, there was some anxiety on passing the baton, but he's proven to pick up exactly where she (previous Chairwoman Janet Yellen) left off," Ms. Zink said.
There was a slow shift upward in the total yield curve over the course of the first quarter, and the 10-year U.S. Treasury rose to 2.7% from 2.5%.
The median return for domestic high-yield strategies in Morningstar's universe was 4.1% for the one-year period, while the median return for Morningstar's entire domestic fixed-income universe was 1.78%.
Ms. Zink noted it was one of the first quarters in a long time where long Treasuries lost 3.3% due to the long end of the yield curve finally rising.
Higher inflation expectations in the rising rate environment proved challenging for mortgages, she said. Mortgages lost 1.2% for the quarter, as did Treasuries.
After 2017, a year when credit performed well, investment-grade credit lost 2.3%, but high yield only lost 1% in the first quarter. In fact, higher (rated) tiers of credit suffered greater losses than lower tiers of credit — signaling that the source of the performance dip was related to interest-rate risk rather than a change in credit fundamentals.
"Within credit, banks continued to perform well, particularly given the change in the corporate tax rate. The energy sector was a strong performer, buoyed by strengthening oil prices," Ms. Zink said.
What performed well over the quarter were bond strategies with the flexibility to invest in sectors outside of the traditional core-bond landscape — allocations to high yield, emerging markets and foreign currencies, given the weaker dollar, were particularly helpful performance differentiators, Ms. Zink said. Strategies with shorter duration also benefited.
The Bloomberg Barclays U.S. Corporate High-Yield index returned 3.78% for the year ended March 31 and the Bloomberg Barclays U.S. Aggregate Bond index returned 1.2%.
TCW Group Inc.'s AlphaTrak strategy once again topped the domestic fixed-income list with a gross return of 13.6% for the 12 months ended March 31 and again topped the five-year list with an annualized gross return of 15.23%.
AlphaTrak has remained at the No.1 spot in the list of one-year gross returns every quarter of 2017 and has topped the five-year list since the third quarter of 2016.
Morningstar classifies AlphaTrak as ultrashort fixed income but TCW considers it an enhanced equity indexing strategy that uses S&P 500 futures to get equity index exposure while short-term fixed-income securities are actively managed to enhance returns above the 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 commercial and residential mortgage-backed securities.
BNY Mellon Investment Management's Standish non-U.S. unhedged corporate bond fund came in at No. 2 on the list, returning 13.48% for the year.
David Leduc, chief investment officer, active fixed income, at BNY Mellon Asset Management North America in Boston, said the unhedged strategy has "full flexibility to invest in markets in or out of U.S." The fund saw "strong positive returns benefiting from positions in the euro and Japanese yen."
Additionally, returns also were helped by strength in European interest rates.
"In Europe, we've been constructive on peripheral country interest rates — Spain, Portugal, Italy — in long-duration bonds," said Mr. Leduc. "As the European economy's been improving, specifically the credit health of these peripheral economies in Europe, those interest rates have been relatively higher than core markets such as France or Germany."
As a result, Mr. Leduc explained that those non-core markets have had more yield and those yields have come down, which is helpful to bond prices.
Meanwhile, the company was short U.S. duration and underweight U.K. duration.
Mr. Leduc said that when it comes to sectors, the firm remains "constructive on energy and on financials."
"Despite some of the noise we've been hearing, we've seen an environment where reasonable growth of fixed-income strategies is being supported and should continue," Mr. Leduc added.
