Fixed income: Fewer high-yield strategies

High-yield strategies continued to lead the top fixed-income strategies for the one-year period ended Sept. 30, according to Morningstar Inc.’s separate-account/collective-investment-trust database, though their dominance of late has waned.

Five of the top 10 strategies in the separate-account universe were high-yield bonds, compared with seven of the top 10 three months prior. And while the median returns for the quarter and the one-year period ended Sept. 30 for all fixed-income separate accounts in the Morningstar database were 3.02% and 9.5%, respectively, they lagged behind returns from three months earlier, at 3.27% for the quarter and 13.26% for the one-year period.

The Barclays Capital U.S. Government/Credit index returned 8.73%, and the Credit Suisse High Yield Index returned 10.93% for one-year period ended Sept. 30.

Adam Baranowski, a data analyst with Morningstar, said that the latest numbers may not show how well high-yield fixed-income strategies have performed. They have done very well for the past four consecutive quarters, particularly in the second and third quarters of 2009 — and only the third quarter 2009 is reflected in the latest one-year performance numbers.

“I want to make sure people understand that [high-yield strategies] dropped a bit but had a better third quarter than second quarter in 2010,” Mr. Baranowski said. “It looks like they are dropping, but actually it’s been a very good quarter.”

The Credit Suisse High Yield Index returned 5.96% for the third quarter of 2010.

Brookfield Investment Management Inc.’s CMBS Composite strategy was the top-performing strategy for the second quarter in a row, with a one-year gross return of 64.64%. The strategy returned 81.36% for the one-year period ended June 30 and had a one-year gross return of 22.95% in the third quarter of 2009.

In the past year, there has been a “significant recovery for CMBS, which was extremely undervalued 12 to 18 months ago,” Michelle Russell-Dowe, managing director and head of structured products for Brookfield, wrote in an e-mail.

“The steps to the recovery of CMBS have been accelerated, through the additional demand brought to the sector by the Public-Private Investment Program, and the return of leverage through financing,” she wrote. “Both had a significant impact on prices in the senior portion of the capital structure. Slow improvement in lending and im-proved expectations in commercial real estate has also helped lift valuations from an overly punitive level present more than a year ago.”

She noted that Brookfield’s CMBS Composite strategy emphasizes “highly opportunistic securities within CMBS, capitalizing on Brookfield’s real estate experience.”

DEEP CYCLICALS

Advisors Asset Management Group Inc. took second place with its Advisors Credit Opportunities strategy, with a one-year gross return of 31.3% as of Sept. 30. The strategy had a one-year gross return of 50.12% for the one-year period ended June 30 and a one-year gross return of 13.63% for the one-year period a year earlier. The high-yield-bond strategy is focused on mortgage-backed and asset-backed securities, with positions in deep cyclicals, transportation, homebuilders, casinos and airlines, among others, Scott Colyer chief executive and chief investment officer for Advisors, said in an interview.

“I think our company is a pretty traditional high-yield management company where essentially it’s a bottom-up credit drive approach,” Mr. Colyer said.

He said the strategy focuses on companies that “were pretty beaten down that would do well in recovery mode.”

“The recovery has been slower than people expected, but the quest for yield has continued,” he said. “Aggressive actions by the Fed drove high-yield-bond prices up and the risk spreads down, and that probably continues. We are not at the end of this move but somewhere in the middle of this move.”

Mr. Colyer said he does not expect to change the direction of the portfolio “until we see the Fed change their actions.”

Penn Capital Management took third with its Distressed Total Return strategy, with a one-year gross return of 30.69% as of Sept. 30. The strategy returned a one-year gross return of 58.16% through June 30 and a one-year gross return of 42.96% for the comparable one-year period in 2009.

Martin Smith, senior portfolio manager and partner at Penn Capital, said that the strategy is overweight financials and also has had success with positions in health care and media.

The Distressed Total Return strategy focuses on distressed companies, Mr. Smith said, particularly those companies that have experienced near-term distress due to “glitches in the operation but have a clear path to righting the ship and deleveraging.” The strategy typically focuses on companies that analysts believe will become profitable in 18 to 24 months.

“We’re finding more opportunities in the current-pay securities,” he said, noting that such companies are current on all debt obligations.

Rounding out the top 10 were MFC Global Investment Management’s U.S. High-Yield Fixed-Income strategy at 28.43%, SMH Capital Advisors Inc.’s High-Yield Institutional at 27.06%, Metropolitan West Asset Management LLC’s Strategic Income strategy at 25.93%, Western Asset Management Co.’s U.S. Index Plus at 23.88%, DuPont Capital Management Inc.’s DCM High-Yield strategy at 23.81%, Standish Mellon Asset Management Co. LLC’s U.S. Long Duration strategy at 22.99% and Principal Global Investors’ Spectrum Preferred Securities strategy at 22.9%.

Among collective investment trusts, the DCM High-Yield Bond fund had the top overall one-year gross return as of Sept. 30 at 24.9%.

The remaining top five were Neuberger Berman Group LLC’s High Yield fund, with a one-year gross return of 19.47%; The Goldman Sachs Group Inc.’s U.S. Long Duration Fixed-Income CIT strategy, 17.07%; Prudential Financial Inc.’s Pru Higher Quality High-Yield CIT Institutional Class fund, 16.74%; and Prudential’s Private Placement LP fund, 15.54%.

The median one-year return for collective investment trusts was 8.78%.

Timothy Inklebarger is a reporter at sister publication Pensions & Investments.