The top-performing fixed-income managers in 2022 managed to post positive returns during a historically poor year for the asset class, according to Morningstar Inc.'s separate account/collective investment trust database.
Five of the top 10 managers fell within Morningstar's ultrashort bond category (down from eight of 10 the previous quarter), while three of the top 10 fell within the multisector bond category, one within the non-traditional bond category, and one strategy – the top overall – fell within Morningstar's muni national long bond category.
For the year ended Dec. 31, the median return in Morningstar's domestic fixed-income universe was -7.5%; the Bloomberg U.S. Aggregate Bond index returned -13% for the period.
Peter Marchese, a senior fixed-income manager research analyst at Morningstar in Chicago, said in a phone interview that the weak performance for the full year could be attributed not only to rising interest rates, but the swiftness of that rise.
"It's the highest rate of rate increases we've seen in decades — at least in the last 25 years — and so when rates rise that fast that pulls down the prices of all bonds that have a maturity date of one year or longer," Mr. Marchese said, "and it pulls them down to negative territory that we haven't seen in many, many years."
In the third quarter, the Federal Open Market Committee raised the target range for the federal funds rate by 75 basis points in July and again in September to a range of 3% to 3.75%. Those hikes followed a 75-basis-point increase in June, a 50-basis-point increase in May and a 25-basis-point increase in March.
In the fourth quarter, however, inflation cooled slightly and the Fed's feverish pace slowed down accordingly after an additional 75-basis-point increase in November. In December, the Fed raised rates only by 50 basis points. Since then, the Fed in February slowed down even more with a 25-basis-point increase to a range of 4.5% to 4.75%.
"The market had what was a risk-on rally in the fourth quarter, where investors embraced bank loans, high yield and corporate bonds," Mr. Marchese said. "In the third quarter … the market really got scared about the likelihood of a recession and once the inflation numbers in November came, moderated just a bit."
Bonds were incredibly cheap during the fourth quarter, Mr. Marchese said.
"There were yields in high yield that were 8%," he said. "Institutional investors jumped in and bought these attractively priced corporate bonds of all flavors."
The median return among domestic high-yield strategies in Morningstar's universe for the year ended Dec. 31 was -9.3%. But the median return for the fourth quarter was 4.1%, above the 2.2% for the broad fixed-income universe.
The top performer among domestic fixed-income strategies was New York-based 16th Amendment Advisors LLC's Vicksburg strategy, which posted a gross return of 46.03% for the year ended Dec. 31. The strategy also topped the list of top managers for the five years ended Dec. 31, with an annualized gross return of 38.38%.
John J. Lee, a co-founder and managing member of the firm, said in an email that the strategy benefited from a "cautious and bearish outlook on interest rates in general. Further, it took advantage of the disarray in the marketplace due to sharply rising rates and historically volatile markets."
The strategy had also topped the lists for the one year and five years ended Sept. 30, 2021, and in an interview that November, Mr. Lee said Vicksburg is a total return, institutional fixed-income strategy.
It holds investment-grade municipal bonds, corporate bonds and their hedges in a strategy that is targeted to investors looking for non-correlated high-grade fixed-income exposure, he said.