Long duration fixed-income managers rode a wave of falling interest rates to take seven of the top 10 slots among all separate account managers in the Pensions & Investments Performance Evaluation Report for the one-year period ending Sept. 30.
Led by Wilton, Conn.-based Bridgewater Associates' extra long-duration bonds composite, long-duration managers in the top ten reported returns ranging from 14.8% to 40.7%.
Other styles among the leaders for the year were a medium-grade composite, an all long-term or all short-term strategy, and an options-based strategy.
Long-duration managers posted very strong returns ranging from 5.9% to 12.4% for the quarter ended Sept. 30.
The median long-duration separate account manager reported returns of 13.6% for the year ended Sept. 30.
Returns for the quarter, three-year, and five-year periods were 5.1%, 12.7%, and 9.3%, respectively.
Meanwhile, the median separate account fixed income manager reported returns of 9.3% for the year, 3.1% for the quarter, 9.1% for the three-year period, and 6.9% for the five year period.
Among commingled funds in the PIPER database, long duration style funds also were strong performers taking four of the top 10 slots, in the one year period, and five of the top 10 slots in the third quarter.
The median fixed income commingled fund in PIPER returned 9.4% in the year ended Sept. 30. Returns for the median commingled fixed income fund for the quarter, three-year, and five year period were 3.2%, 9.1%, and 6.8%, respectively.
Fixed-income securities in general performed well in the year and the quarter. The Lehman Brothers Government Corporate Index returned 9.6% in the year ended Sept. 30, and 3.5% in the quarter, while the Salomon Brothers Broad Bond Index returned 9.7% and 3.3%, respectively.
Over longer periods, the Lehman Brothers Government Corporate index returned 9.4% for three years, and 7% for five years, ended Sept. 30, while the Salomon Broad returned 9.5% and 7%, for the same respective periods. (All returns for periods greater than one year are annualized).
The 30-year U.S. Treasury bond returned 11.9% in the year, 6.4% in the quarter, 11.4% for the three-year period and 7.6% for the five-year period.
Robert Prince, director of research and trading for Bridgewater, said its extra long duration strategy is designed to allow investors to minimize their allocations to bonds and maximize their allocations to stocks.
The strategy is designed to provide the diversification of bond price movements with the lowest possible allocation to bonds, Mr. Prince said.
The strategy was ranked first among PIPER managed accounts in the one year period ended Sept. 30, with a return of 40.7%.
Bridgewater's extra long-duration strategy also ranked highly among managed accounts in other time periods. It was first in the third quarter, three-year, and five year periods, with respective returns of 12.4%, 32.6%, and 14.8%.
The second-ranked managed strategy for the year is the long-duration composite managed by NISA Investment Advisors L.L.C., St. Louis, although chief investment officer Jess Yawitz says the returns come as a result of clients seeking long-duration exposure.
"I guess what I'm saying is I'm not taking much credit for it," Mr. Yawitz said.
He said NISA has clients that want long-duration fixed income exposure for things such as liability matching. Nonetheless, NISA actively manages the accounts, seeking to purchase undervalued securities and selling overvalued ones, he said.
NISA also ranked highly in the quarter, three-year, and five year periods. Its long-duration managed account strategy ranked second in the quarter with a return of 9.5%, fourth over both three years and five years with respective returns of 16.2% and 11.3%.
Western Asset Management, Pasadena, Calif. ranked third among PIPER fixed-income separate account managers for the one-year period with a return of 19% for its long-duration composite. Western was ranked fourth for the three month period with a return of 7.5%, fifth over the three-year period with a return of 15.9%, and third over the five year period with a return of 12.3%.
Western Asset executives couldn't be reached for comment.
Managed account portfolios in the medium-grade composite managed by Loomis, Sayles & Co., Boston, posted a return of 18.1% for the one year, ranking it fourth.
Tim Haarmann, vice president for Loomis, said accounts in the composite will be up to 50% in high-yield securities, with portfolios currently holding about 26% in junk bonds. Loomis uses a valuation method in selecting securities for portfolios in the composite, using credit analysis.
"We try to find value in what other people would misprice or misinterpret or misunderstand," Mr. Haarmann said.
Loomis' medium-grade composite also ranked highly in other periods. It ranked ninth in the quarter with a return of 5.9%, second over three years and five years with respective returns of 16.4% and 12.5%.
ABB Investment Management Corp., Stamford, Conn., ranked fifth for the year period with a return of 17.7% in its long-duration government composite. Portfolio managers there seek to add value through duration management and expected changes in the shape of the fixed-income yield curve, said Anders Ekernas, president.
ABB's long duration strategy ranked third over both the quarter and three-year period, with respective returns of 7.7% and 16.3%, and sixth over five years, with a return of 10.7%.
Hoisington Investment Management Co., Austin, was ranked sixth in the year, with a return of 15.8% for its fixed-income composite. Hoisington uses an unusual investment style, positioning portfolios either completely in long-term U.S. Treasuries or completely in cash, depending on the firm's view of inflation and risk.
Van Hoisington, president, said the firm has been completely invested in long-term treasuries since 1990, and remains that way.
Moreover, he said, Hoisington has 20% of portfolios in long-dated zero coupon securities, which move even more sharply during interest rate changes.
Hoisington's composite ranked fifth in the quarter with a return of 7.4% and eighth for the three-year period, with a return of 14.1%.
J.P. Morgan Investment Management Inc., New York, ranked seventh for the year with a return of 15.5% in its long-duration portfolio composite.
Gerry Lillis, managing director and co-head of fixed income for J.P. Morgan, said the firm's managers use the same basic fixed income style for all of its portfolios. They seek higher-yielding securities, actively manage duration, and will use derivatives and zero coupon securities to manage duration if value is being found in the shorter end of the yield curve, he said. If allowed, emerging markets and high-yield bonds are used selectively.
The firm was one-third invested in U.S. Treasuries, and two-third invested in mortgage-backed securities and corporate issues, with an emphasis on mortgage-backeds, he said. More recently, volatility has made it more difficult to manage long duration portfolios, he said. As a result, J.P. Morgan managers may focus more on higher yielding securities, and will keep duration neutral to or slightly longer than the benchmarks.
Pacific Investment Management Co., Newport Beach, Calif., ranked eighth in the year, with a return of 15.4% for its long duration composite. The strategy also ranked sixth for the three-year period with a return of 15.2% and fifth for the five-year period, with a return of 11%.
Analytic TSA Global Asset Management, Los Angeles, ranked ninth for the year, with its fixed-income plus composite, a strategy that combines short-term fixed income investments for about 98% of portfolios with 2% of the portfolio going into options strategies.
The options positions are "very low risk," although they do take market exposure, said Greg McMurran, chief investment officer.
The risk is comparable to a corporate bond portfolio.
Analytic TSA's fixed income plus also ranked eighth in the quarterly period, with a return of 6%.
The tenth ranked PIPER composite for the year, was the long duration composite managed by UBS Asset Management (N.Y.) Inc., New York. Ranji Nagaswami, head of fixed income, said: *"Security selection has been a big part of our value-added."
Portfolio durations have been kept close to benchmarks, because believed the bond market was entering a trading range, she said.
