Thanks to a "dovish pivot" from the Federal Reserve and a risk-on quarter, high-yield bond strategies took half of the top 10 spots for the year ended March 31, according to Morningstar Inc.'s separate account/collective investment trust database.
There was a lot of stress in the market in the fourth quarter of 2018. Funds with larger exposures to high yield were hit hard. But in early 2019, the Federal Open Market Committee decided to keep rates steady and signaled it was not likely to raise rates in 2019.
"The central event that drove what we're seeing is this dovish pivot from the Fed," said Gabe Dennis, associate analyst, fixed-income strategies at Morningstar in Chicago. "The market consensus became 'let the good times roll.' "
Following that decision, Treasury yields fell, credit spreads tightened and riskier assets, including high yield and emerging markets, did well during the first quarter.
"It was a risk-on quarter, the Fed assumed a dovish tone, so the first quarter looked particularly healthy, especially when you contrast it with the fourth quarter of 2018," said Emory Zink, senior fund analyst, fixed-income strategies, at Morningstar.
The Morningstar analysts said in a phone interview that energy made a comeback in the first quarter after doing so poorly in previous quarters.
"Oil prices, which have been very low, came back in the first quarter," Mr. Dennis said. "This had to do with the rise in high yield as well. Companies with exposure to oil and energy industry did pretty well."
The median return for domestic high-yield strategies in Morningstar's universe was 5.43% for the one-year period ended March 31, while the median return for Morningstar's entire domestic fixed-income universe was 4.48%.
The Bloomberg Barclays U.S. Corporate High-Yield index returned 5.93% for the 12 months ended March 31 and the Bloomberg Barclays U.S. Aggregate Bond index returned 4.48% for the year.
Although high-yield strategies reigned supreme for the year ended March 31, the strategy that topped the list was a municipal intermediate-term bond strategy. Thomas J. Herzfeld Advisors Inc.'s tax-exempt composite bond fund posted a gross return of 11.84% for the 12 months ended March 31.
Ryan Paylor, portfolio manager of the Herzfeld bond fund, Miami Beach, Fla., said the fund specializes in buying closed-end funds that invest in municipal bond strategies.
"We take advantage of the inefficiency that we see in the closed-end funds market where we can generate alpha regardless of how the underlying munis are performing," Mr. Paylor said. "Munis were an attractive asset class in the first quarter."
Mr. Paylor added that the strategy "picked a slate of" funds managed by Pacific Investment Management Co. LLC, which "did really well in the first quarter," with one fund — PIMCO California Municipal Income Fund II — up 16.6% in the first quarter.
Also, Herzfeld's fixed-income composite bond fund was the top strategy for the five years ended March 31, with an annualized gross return of 8.74%.