Morningstar’s Mr. Denis said the third quarter was “overall, a strong quarter for municipals.” He noted a more risk-on sentiment during the quarter, in which A and BBB municipal bonds outperformed their higher-rated AA and AAA counterparts.
“Flows in munis have been kind of mixed. So flows were positive in the quarter, and heavier in July and August when there was more of that risk-on sentiment, and started to slow down a little bit in September. September, specifically, is when there was a lot more concern as to whether there was going to be an actual stimulus package,” he said.
Investor sentiment is that many municipal bond strategies will have exposures that could make them more sensitive to slower consumer activity and continued lockdowns that affect transportation and movement, Mr. Denis said.
The Bloomberg Barclays U.S. Municipal bond index returned 4.08% return for the year ended Sept. 30. The Bloomberg Barclays U.S. Long-Government Bond index returned 16.16% for the year ended Sept. 30; the Bloomberg Barclays U.S. Aggregate Bond index had a one-year return of 6.96%; and the Bloomberg Barclays Global Aggregate ex-U.S. Bond index returned 5.46% for the year.
For the year ended Sept. 30, the median one-year return for long-duration domestic strategies in Morningstar’s universe was 12.53% and the median return for Morningstar’s entire domestic fixed-income universe was 5.18%.
Pacific Investment Management Co.’s Real Return Asset Long Duration strategy was in second place on the list with a gross 23.67% return for the year ended Sept. 30.
Steve Rodosky, a managing director and portfolio manager for real return and U.S. long-duration strategies at PIMCO in Newport Beach, Calif., said real yields in the U.S. — yields after compensating for inflation — fell more than 100 basis points early in 2020 from year-end 2019. PIMCO’s Real Return Asset Long Duration strategy, which is in Morningstar’s U.S. inflation-protected bond category, benefited from the repricing and adjusted forecast of real yields following the economic shock brought about by the onset of the COVID-19 pandemic.
“We benefited from that rally because we had been anticipating more slowing and we were positioned for that to occur,” Mr. Rodosky said.
In the second half of 2020, Mr. Rodosky said the strategy was also well positioned when inflation expectations recovered as hopes for a vaccine rose and people adjusted to the economic impact.
“There, too, we’ve been positioned to benefit and that also helped us get some alpha over and above the beta. First, the plummet in real yields, and then the recovery and inflation expectations were the two main contributors to our performance,” he said.
PIMCO’s Mike Cudzil, a managing director, senior member of the liability-driven investment portfolio management team and a generalist portfolio manager, added: “That’s a function of all the resources here at PIMCO, which help us to generate alpha in various markets and sectors. That’s more nuanced positioning in Treasuries and other (relative value) positions, whether it’s coupon STRIPS vs. whole bonds, or futures vs. cash, or agency debentures or some very safe credit.”
Aegon USA Investment Management LLC’s Long U.S. Treasury STRIPS strategy moved down one spot into third place on Morningstar’s list, with a 21.65% gross return for the year.
NISA Investment Advisors LLC’s 15+ STRIPS fixed-income composite had a 20.82% return, which kept it in the fourth spot on the one-year list for a second consecutive quarter, while a gross 10.87% return put the strategy in fourth place for the five-year period.
Barrow, Hanley, Mewhinney & Strauss LLC’s Extended Duration strategy was close behind on the one-year list, with a 20.57% return for the year. The strategy’s gross 11.28% ranked return third among five-year returns.
For the five-year period, PIMCO’s Long Bond Extended Duration strategy was in second place, with a gross return of 11.39%.
Mr. Cudzil noted the impact of monetary policy on the Long Bond Extended Duration strategy, as central banks have continued to keep rates at historic lows.
“A lot of the performance that you see is simply the decline in yields from the beginning of the year and then, obviously, we’ve been kind of in a secular decline in yields more generally, and more broadly,” he said.
He said the risk-off environment in 2020 also contributed to the strategy’s outperformance for the period ended Sept. 30 because the portfolio’s 27-year duration is negatively correlated to risky assets and the long duration has been an effective liability hedge.
“It has been for the better part of a few decades and it still remains so, with the hedging properties probably a little bit less than they have been in the past but it still remains a hedge to risk-off,” he said.
MetLife Investment Management’s Long Credit strategy rounded out the top five for the five-year period, with a gross return of 10.61%.
The median five-year annualized return for long-duration domestic strategies in Morningstar’s universe was 9.24% and the median five-year return for Morningstar’s entire domestic fixed-income universe was 4.27%.
The Bloomberg Barclays U.S. Municipal bond index had an annualized 3.84% return for the five-year period; the Bloomberg Barclays U.S. Long-Government Bond index had an 8.18% return; the Bloomberg Barclays U.S. Aggregate Bond index returned 4.17%; and the Bloomberg Barclays Global Aggregate ex-U.S. Bond index had a 3.59% return for the five years ended Sept. 30.
