Fixed income: Long strategies continue to lead the pack

AUG 26, 2012
Long-term bond strategies once again swept the best-performing fixed-income managers' rankings in the separate account/collective investment trust database compiled by Morningstar Inc. All 10 of the top-performing separate account strategies in the overall universe for the 12-month period ended June 30 were long bonds, making long-term strategies the top earners for the fourth straight quarter. Nine also appeared on the list in the previous period, while the top three remained exactly the same. “From the makeup of the top 10, there's obviously not much turnover,” said Diana Scott, a product development manager for separate accounts at Morningstar. “It's completely dominated by long-term bonds and long-term government.” The lack of turnover among the leaders can be attributed to the economic environment: When interest rates are low, bond values are higher. Although long-term bonds can be risky, Ms. Scott pointed out that they can produce strong returns when interest rates remain low. “Long-duration strategies are clearly benefiting in what is considered a dismal and volatile market,” she said. For the 12-month period, the median return among all domestic fixed-income separate account portfolios was 7.01%. In the long-duration universe, the median was 20.88%. The Barclays Government/Credit Index returned 8.79% during the period, while the BarCap Long Government/Credit Index returned 24.58%. “When I see the headlines, it's easy to think everything did poorly,” Ms. Scott said. “But when looking at the numbers, it's interesting and informative to separate the emotional and headline-type issues and realize not everything is negative.” The top two strategies in the overall universe belonged to NISA Investment Advisors LLC. On top for the third straight quarter was the NISA 15+ Strips portfolio, with a 12-month gross return of 57.3%. The strategy — which invests in Treasury STRIPS and zero-coupon securities that don't mature for at least 15 years — also finished fourth among five-year returns with an annualized 16.59% The NISA long-duration government-only consolidated strategy came in second, with a 12-month gross return of 55.87%. The strategy also took the fifth spot on the five-year-return list with an annualized 16.37%. “While we are pleased with our performance relative to the chosen benchmark, the absolute performance of our long-duration accounts is a testament to our clients' identifying the key role fixed income can play when managing the interest rate risk inherent in pension liabilities,” David Eichhorn, director of investment strategies at NISA, wrote in an e-mail. NISA had a third strategy in the top 10. Its long-duration government/credit consolidated portfolio ranked ninth, with 29.7%. In third place, for the third straight quarter, was Hoisington Investment Management Co.'s macroeconomic fixed-income composite strategy, which had a gross 12-month return of 44.66%. The strategy also tied for eighth over five years with an annualized 14.27% return.

INFLATION RATE

The strategy's investment decisions are based on the multiyear trend in the domestic inflation rate. “Our portfolio has not changed over the past year,” said Lacy Hunt, executive vice president and vice chairman of the strategic investment committee at Hoisington. Following Hoisington was Hills-wick Asset Management LLC's long-duration government strategy, at 37.46%. It was sixth for five-year returns with an annualized 15.32%. The portfolio has a big weighting in Treasury coupons and government-owned and -linked entities. “The reason we have performed so well is that we managed duration,” said Mark McDonnell, president and senior portfolio manager at Hillswick. The firm added corporate debt weighting as spreads widened in June, Mr. McDonnell said. By adjusting the portfolio in the face of falling interest rates, the European crisis and nominal U.S. growth, the strategy experienced a positive rally over the past year, he said. Rounding out the top five was Jennison Associates LLC's active long-duration government portfolio with a gross 12-month return of 33.45%. The strategy also placed 10th in the five-year rankings with an annualized 14.22%. Melanie Zanona is the editorial assistant at sibling publication Pensions & Investments.

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