Long-duration strategies again reign supreme among bond strategies

Long-duration bond strategies once again dominated the list of top-performing fixed-income strategies for the year ended Sept. 30, filling all of the top 10 spots as they did during the 12 months ended June 30, according to Morningstar Inc.'s separate account/collective investment trust database.

Lower rates, a strong U.S. dollar and volatile markets led to long-duration strategies, particularly U.S. Treasuries, doing well for the period.

"This was another quarter of positive returns," said Gabriel Denis, associate analyst, fixed-income strategies at Morningstar in Chicago. "Treasuries did very well this quarter."

Mr. Denis added that the third quarter experienced increased volatility due to a "general anxiety over how the global economy is doing," which led to investors being more cautious. This anxiety — driven by trade war fears, rate cuts from the Federal Open Market Committee and the attack on state-owned Saudi Aramco oil processing facilities on Sept. 14 — led to an increased demand for safe-haven assets, which in turn led to a high demand for Treasuries during the quarter, he said.

Treasury yields also saw significant lows, according to the Morningstar analyst, with the 30-year Treasury bond hitting an all-time low when it reached 2.09% in August. But due to the Fed cutting rates on Sept. 18, Treasury yields went up slightly toward the end of the quarter, bringing returns back down a little bit.

The dollar performed well during the quarter, which, when combined with the demand for safe-haven assets, also increased investor appetite for U.S. Treasuries.

"I wouldn't say there's causation, but anything that had exposure to the long end of the curve did well," Mr. Denis said.

For the year ended Sept. 30, the median return for long-duration domestic strategies in Morningstar's universe was 20.97%, the median return for domestic high-yield fixed income was 6.44%, and the median for Morningstar's entire domestic fixed-income universe was 7.87%.

The Bloomberg Barclays U.S. Long-Duration Government/Credit index returned 21.88% for the 12 months ended Sept. 30, the Bloomberg Barclays U.S. Aggregate Bond index returned 10.3%, and the Bloomberg Barclays U.S. Corporate High-Yield index returned 6.36% for the year.

Aegon USA Investment Management LLC's Long U.S. Treasury STRIPS strategy topped Morningstar's list of top performers for the year ended Sept. 30, posting a gross return of 34.35%.

Calvin Norris, portfolio manager for the strategy, Cedar Rapids, Iowa, said in a phone interview that the strategy is "a pure STRIPS portfolio" that doesn't use derivatives.

"It's a portfolio primarily designed for pension clients that need long duration," Mr. Norris said. "It's designed to perform comparably with the Bloomberg Barclays (U.S. Treasury) 20-Plus Year index, which has a duration of approximately 25 years."

He added that managers of the strategy are mindful of how expensive it is to trade STRIPS, so they try to keep the level of turnover within the portfolio low.

"We understand how important it is to minimize transaction costs," Mr. Norris said. "It's not that we don't trade within the portfolio, we do, but we try to limit trading within the portfolio, keeping the long-term strategic goals of our clients in mind and avoiding unnecessary transaction costs as much as possible."

Mr. Norris noted that the slowing economy led to a decline in inflation expectations, which has "been a theme that's been in place largely in the last 12 months, but it hit its apex in the third quarter."

NISA Investment Advisors LLC's 15+ STRIPS fixed-income composite was in second place on the year, posting a gross return of 33.02%. It also ranked second for the five years ended Sept. 30, returning an annualized gross 9.15%.

Joseph A. Murphy, director, portfolio management at NISA Investment Advisors, St. Louis, attributed the strong return to the "significant drop in long-duration Treasury yields."

"Long-duration Treasury securities have significant positive returns when you have a significant interest rate drop like that," Mr. Murphy said.

He added that many of the firm's clients have used long-duration STRIPS as an allocation to hedge that interest rate exposure.

Another reason why STRIPS strategies did so well was due to the "trillions of dollars of sovereign debt trading at a negative yield."

"So, rates in the U.S. didn't look that low relative to other parts of the world," Mr. Murphy said.

Coming in at No. 3 on the one-year list was Hoisington Investment Management Co.'s macroeconomic fixed-income composite, returning a gross 29.02% for the 12 months ended Sept. 30.

"We're duration managers," Lacy Hunt, chief economist at Hoisington in Austin, said. "We take a multiyear view and develop a longer-term strategy."

Fourth on the list was Optimum Quantvest Corp.'s (formerly Hillswick Asset Management LLC's) long-duration government bond fund, returning 25.66%. It also ranked fourth for the five-year list, returning a gross 8.1%.

"We're macro-driven investors that try to add value with a number of levers, one of which is active duration management," said Mark McDonnell, senior portfolio manager for fixed-income strategies at Optimum Quantvest. "In a lower-rate environment, active management is needed to add value."

Mr. McDonnell echoed the sentiment that other fixed-income managers said, which is that, "as global growth slowed, the demand for safe assets grew as well."

Hillswick Asset Management was acquired in May.

Rounding out the top five fixed-income strategies for the year ended Sept. 30 was Pacific Investment Management Co. LLC's Long-Duration Treasury strategy, returning a gross 23.81%.

Miami Beach, Fla.-based Thomas J. Herzfeld Advisors Inc.'s fixed-income composite topped the list for the five-year period for the fifth quarter in a row, posting a gross annualized return of 9.33%. All multiyear returns are annualized.

The median return for long-duration bond strategies in Morningstar's universe was 7.04% for the five years ended Sept. 30, domestic high-yield strategies returned 5.08%, and the entire Morningstar domestic fixed-income universe returned a median 3.54% for the five-year period.

The Bloomberg Barclays U.S. Long-Duration Government/Credit index returned 6.81% for the five-year period, the Bloomberg Barclays' U.S. Corporate High-Yield index returned 5.37%, and the Bloomberg Barclays U.S. Aggregate Bond index returned 3.38% for the five years ended Sept. 30.

PIMCO's Long Term Bond-Long Credit strategy followed the NISA strategy in third, at 8.29%; and Logan Circle Partners LP's Long Credit strategy ranked fifth, with a gross annualized 8.02% for the five years ended Sept. 30.

Fidelity Institutional Asset Management's Long U.S. Treasury STRIPS Pool Index topped Morningstar's domestic collective investment trust universe for the one and five years ended Sept. 30, with a net 36.23% and 9.66%, respectively.

BlackRock Inc.'s 20+ Treasury Bond Fund ranked second for the one-year list, with a net 25.28%, and fourth on the five-year list with a net annualized 7.11%.

FIAM's Target Date Long-Term Treasury Index Commingled Pool came in third place, returning a net 25.05% for the year ended Sept. 30. T. Rowe Price Group Inc. rounded out the top five CIT list, with its U.S. Treasury Long-Term Index Trust and U.S. Treasury Long-Term Index Trust-Z both returning 24.9%.

Wellington Management Co. LLP's CIF II U.S. Investment Grade Corporate Long Bond ranked second on Morningstar's domestic CIT universe for the five years ended Sept. 30, with a net 7.36%, while Wellington's CIF II Long Bond strategy came in third place, with a net 7.29% return. Closing out the top five for the five-year list is BNY Mellon Investment Management's DB NSL High-Quality Long Corporate CIT, returning a net 7.1%.

All data for Pensions & Investments' top-performing managers report are provided from Morningstar's global separate account/collective investment trust database. The data for the rankings on which this story is based were pulled Nov. 1.