Long-duration bond strategies filled nine of the top 10 spots on Morningstar's fixed-income list for the year ended Dec. 31, with corporate bonds displacing the long-term government strategies that occupied the top five spaces for the year ended Sept. 30.
"The U.S. Treasury long index, that's an index looking at Treasuries with maturities of 10 years or longer, is used as a proxy for a safe-haven holding area, for a risk-off sentiment," said Gabriel Denis, analyst, fixed-income strategies at Morningstar in Chicago. "Overall, the index had its best year since 2014 but at the end of the fourth quarter 2019, it was one of the worst-performing sectors. Just for the fourth quarter, the long Treasury index underperformed and dropped 4%."
The Bloomberg Barclays U.S. Long Credit index gained 23.36% for the year, the Bloomberg Barclays U.S. Long-Duration Government/Credit index returned 19.59% and the Bloomberg Barclays Long U.S. Treasury index returned 14.83% for the year ended Dec. 31.
Economic and geopolitical conditions made many investors more optimistic about risk assets during the fourth quarter, Mr. Denis said. The Federal Reserve signaled the federal funds rate would be kept on hold through 2020, barring significant economic changes, and earlier concerns about an inversion of the U.S. Treasury yield curve abated when the Treasury curve uninverted and steepened in the fourth quarter. Globally, there was perceived momentum toward a phase-one trade deal between China and the U.S. and a decisive election win in the U.K. relieved some uncertainty about Brexit.
"We use the Bloomberg Barclays U.S. Aggregate Bond index as a sort of barometer for the entire U.S. investment-grade fixed-income market, as a way to see general market sentiment," Mr. Denis said. "Its return at the end of 2019, for the fourth quarter, was only 0.2%, which is good but it's not anything too flashy. But if you look at the return overall of 2019, it was nearly 9%, which is the best return in almost 10 years, the best year since 2011. So fixed-income markets did extremely well, as a whole, over 2019. But there was a little bit of a shift in which ones did better at the end of the year."
The Bloomberg Barclays U.S. Aggregate Bond index returned 8.72% and the Bloomberg Barclays Global Aggregate Bond index returned 6.84% for the year ended Dec. 31.
The median one-year return for long-duration strategies in Morningstar's universe was 19.92% and the median return for Morningstar's entire domestic fixed-income universe was 8.39%.
Columbia Threadneedle Investments' Long Duration Investment Grade Corporate Fixed Income portfolio topped Morningstar's list for the year ended Dec. 31, with a gross return of 25.48%.
"This strategy is managed against the long component of the Bloomberg Barclays U.S. Corporate index, with a very bottom-up, credit-intensive research focus," said Tom Murphy, senior portfolio manager and head of investment-grade credit at Columbia Threadneedle in Minneapolis. "There are 2,122 securities in the long corporate index. We have 150 in the fund. So you can call us a lot of things, but we're not closet indexers. What's reflected in the portfolio are the best ideas from our research staff."
The strategy's security-by-security selection process is finding that the majority of the best relative-value opportunities are in the BBB market, Mr. Murphy said, while duration and curve risk are kept neutral relative to the portfolio's long-duration benchmark.
"Duration was a tailwind last year, when you had rates go down anywhere from 90 basis points in two years to 60 basis points in 30 years," Mr. Murphy said. "We're not dismissing that, but our job is to beat our long-duration benchmark. This is a strategy that speaks to the asset-liability management plans of pension funds and the long-duration strategies of sovereign wealth funds and other long-term investors."
BNY Mellon Investment Management's Standish Long Corporate strategy was in second place with a gross return of 24.7%; Pacific Investment Management Co. LLC's Long-Term Bond-Long Credit strategy followed in third place at 24.65%; fourth on the list was PineBridge Investments' U.S. Long-Duration Credit Bond strategy, with 24.49% for the year; and First Trust Global Portfolios Ltd.'s Taxable Closed-End fund was in fifth place with a gross 24.4%.