DDJ Capital Management LLC's bank loan strategy was in second place for the 12 months ended Sept. 30, returning a gross 8.87%.
"In the bank loan strategy, we have identified the B/B- rating class as an inefficient area where there is tremendous additional yield for a small amount of incremental risk because the largest buyers of bank loans, (collateralized loan obligations), have restrictions against buying this rating category. This area of the market requires a strong research team to identify companies that will consistently be able to pay back their debts," said John W. Sherman, the Waltham, Mass.-based portfolio manager of DDJ's bank loan strategy, co-portfolio manager of DDJ's U.S. Opportunistic High Yield strategy, and assistant portfolio manager of DDJ's Total Return Credit strategy.
DDJ's Total Return Credit composite, which is in Morningstar's high-yield bond category, was among the top performers in both the separate account and collective investment trust universes for the period ended Sept. 30.
"In our Total Return Credit strategy, we are overweighting our highest-conviction ideas sourced from all of our credit strategies. The collection of our highest-conviction ideas has resulted in superior performance. This strategy also benefits from guidelines that allow a higher amount of less-liquid investments, which adds to the yield on the portfolio without taking additional credit risk," Mr. Sherman said.
DDJ's Total Return Credit II composite was in fourth place among separate accounts for the year, with a gross return of 7.79%, and the strategy was in second place for the five-year period with an annualized return of 8.87%. Among CITs, DDJ's Total Return Credit I composite topped the one- and five-year lists with a net return of 8.76% for the year and a net 7.29% for the five-year period ended Sept. 30.
Mr. Sherman said: "Our focus at DDJ is on individual credits, building a true bottom-up portfolio, with a simplistic focus of identifying bonds and loans where the borrowers will pay us back at maturity and there is a structural inefficiency, such as smaller size issues or lower ratings, that is causing the yield to be higher than it otherwise should be."
Miami Beach, Fla.-based Thomas J. Herzfeld Advisors Inc.'s fixed-income composite was in third place on the one-year list, with a gross return of 8.69% for the year, and the strategy topped the five-year list with a 10.01% return for the period ended Sept. 30. Herzfeld's fixed-income composite is in Morningstar's high-yield bond category.
"The main drivers in this past quarter was our allocation to CLO equity tranches. Our underlying holdings are fixed income, but the alpha driver this quarter stems from trading around the equity component," said Erik Herzfeld, president and portfolio manager.
Mr. Herzfeld said the strategy uses products traded on exchanges to maximize efficiency while remaining nimble as opportunities arise in fixed-income markets.
"We're taking advantage of a lot of behavioral aspects, which is how we were able to deliver over a 10 alpha over the past three years. We identified CLOs that we felt were underpriced, demonstrating a favorable risk/reward opportunity in the last quarter, one of the best we've seen," Mr. Herzfeld said.
This Herzfeld strategy has been on Morningstar's top 10 list for five consecutive quarters. It was known as Herzfeld's Taxable Closed-End Bond strategy before the second quarter of 2018, and led the one- and five-year rankings for the year ended June 30.
New York-based Schroder Investment Management North America Inc.'s Opportunistic Multi-Sector Securitized strategy's gross return of 8.17% put it in third place for the five years ended Sept. 30.
Rounding out the lists, a 7.43% one-year gross return and a gross annualized 7.8% for the five-year period put the Select High Yield Composite from MacKay Shields LLC, New York, in fifth place on both the one- and five-year lists.
The annualized return for the Bloomberg Barclays' U.S. Corporate High-Yield index was 5.54% for the five-year period, the median return for high-yield strategies was 5.31%, the entire Morningstar domestic fixed-income universe returned a median 2.67%, and the Bloomberg Barclays U.S. Aggregate Bond index returned an annualized 2.16% for the five years ended Sept. 30.