Conning's LDI Credit Over 25 Year Maturity debuted on Morningstar's one-year ranking in first place with a gross return of 16.32%.
"It's (a liability-driven investment) strategy so, ultimately, the objective is focused around the institutional pension plan community and the liabilities that they're managing against. A lot of those liabilities are long-duration in nature, so this strategy is one that we use to provide a way for institutional pension plans, both large and small, to get credit exposure or spread exposure. If you just bought long-duration Treasuries, you would get the rate exposure but not the spread component, so we created this strategy to give you both," said Sean Kurian, the New York-based managing director and head of institutional solutions at Conning.
Looking at performance for the 12 months ended June 30, Mr. Kurian said, "It's really a story around where rates have been. Rate levels at the long end of the market are probably the main driver for stronger returns. The account does invest in credit assets, and the slight overweight to corporates may have helped. In terms of industry sectors within corporates, we've avoided sectors that more recently haven't done as well, for example, energy."
He said a long-duration bias and matching an LDI strategy to a plan's liability profile is not enough for institutional investors, so active credit selection and bottom-up research in the credit markets allow the portfolio to offer additional sources of alpha.
"If you think the long-duration space is kind of staid and vanilla, this strategy is a bit more customized than what you would usually find. Pension plans are strategic investors, given their LDI focus and what they're trying to achieve in the long term, and this strategy is designed to provide that long-duration exposure with the spread so it's not just about rates," Mr. Kurian said.
Columbia Threadneedle Investments' Long Duration Investment Grade Corporate Fixed Income portfolio gained second place on the list, returning a gross 16.13% for the year ended June 30.
Timothy Doubek, senior portfolio manager, investment-grade credit, at Columbia Threadneedle in Minneapolis, said "Our long-duration strategy is managed against the long component of the Bloomberg Barclays corporate index. And we do a very research intensive, very bottom-up credit analysis, adding value through overweighting and underweighting the right issuers and picking the right place on the credit curve, depending on what relative value is."
The strategy uses futures to manage interest-rate risk within the portfolio. "We want to have a risk-neutral portfolio so risk, generally, is the same as the benchmark. Key rate duration, the overall interest-rate risk, we want to have that as close to the benchmark as possible so that when we make good decisions on overweighting and underweighting issuers, or decisions on the credit curve, whether it's underweighting 20-year bonds and overweighting 30-year bonds, we want that to be a pure source of alpha for us," he said.
The investment-grade strategy is focused on the BBB market and credit selection is made with one- to three-year year views on companies, with low issuer turnover, Mr. Doubek said.
"There are a lot of levers to pull within BBB. There's a lot of spread volatility and a lot of issuer comparisons where we can say this high-BBB energy vs. this low-BBB energy being 50 basis points apart is way too wide. When you look at utilities, pipeline, energy, communications, a lot of industrial sectors, the fun is in BBB. That's where you can leverage the research skill and generate alpha," he said.
For the year ended June 30, Mr. Doubek said, "When I look at our relative performance attribution over this period, for example, issuer and bond selection has driven 85% of the alpha. The issuers we invested in outperformed their benchmark peers, particularly within communications and consumer non-cyclicals, including food and beverage, health care and pharmaceuticals. This alpha generation comes from our credit research focus and understanding of how to pick the right point on the credit curve."
Rounding out the top five, Pacific Investment Management Co. LLC's Long-Term Bond - Long Credit strategy was third, returning a gross 15.94%; the Long Corporate strategy of Standish Mellon Asset Management Co. LLC returned 15.83%; and Agincourt Capital Management LLC's Long Duration Credit strategy was in fifth place for the period, with a gross return of 15.65%.
Miami Beach, Fla.-based Thomas J. Herzfeld Advisors Inc.'s Fixed income Composite topped the list for the five-year period, with a gross annualized return of 8.58%. All multiyear returns are annualized.
Herzfeld's strategy has led the list of five-year returns for four consecutive quarters.
The strategy is in Morningstar's high-yield bond category and Erik Herzfeld, president and portfolio manager, said lower-rated securities, particularly leveraged loans, performed well during the first quarter of 2019, but managers began to reduce risk, limit credit exposure and lower the portfolio's duration during the second quarter.