Stable value managers made it to the top of the charts among commingled bond fund managers last quarter, while high-yield bonds stole the show among managed accounts, according to a survey.
Nine of the top 10 commingled fund managers for the fourth-quarter of 1999 and the yearend were managers of stable value or guaranteed investment contract funds. Five of the top 10 for the three years also were stable value specialists.
Among managed bond portfolios in sister publication Pensions & Investments' Performance Evaluation Report (Piper), junk bond managers occupied the top two spots for the quarter. For the three-year period, the winner was a customized, extra long-duration portfolio that performs well when interest rates are rising.
Bond managers endured rock-bottom returns, with the Salomon Brothers Broad Bond index at -0.2% for the quarter and -0.8% for the year. The Broad Bond index returned 5.7% for three years, and 7.7% for five years. All returns for periods of more than one year are compound annualized.
Overall, the median managed account returned 0.1% for the quarter; the median commingled account returned 0.07%. The median return for the year was -0.01% for managed accounts and -0.3% for commingled fund managers. For the three years, Piper managed account bond managers had a median return of 5.8% and commingled fund managers returned a median 5.7%.
Analysis from San Francisco-based Callan Associates Inc. blamed most of bond managers' pain on the Federal Reserve's continued tightening of the fed funds rate throughout 1999. It stood at 5.75% by year's end. The environment was especially bad for U.S. Treasuries, Callan notes.
But on the brighter side, spread strategies performed better than those based on Treasuries, with all spread sectors topping Treasuries. The high-yield bond sector outperformed all other domestic fixed-income, acting true to form in an environment of rising interest rates, Callan found.
And the best of the PIPER managed accounts for the fourth quarter was a high-yield account: Strong Capital Management Inc.'s High Yield Fixed Income portfolio, with 4.4%. In second place: the U.S. High Yield Bond Portfolio with a 3% return for the quarter, managed by UBS Brinson Inc.
In third place for the quarter was the Municipal Bond Fund from Transierra Capital LLC with a 2.5% return, followed by Loomis Sayles & Co. LP's FIM: Medium Grade Bond portfolio at 2.3%. SSBCiti/Salomon Brothers' Enhanced Core Fixed Income portfolio and LM Capital Management Inc.'s Opportunistic Core Fixed Income portfolio tied for fifth at 2.2% each. Fixed-income styles were mixed in the Piper managed account rankings for the year. Strong's high-yield strategy was first again, with 8.5%, followed by the Senior Secured Floating portfolio from Eaton Vance Management, 7.3%; Dwight Asset Management's Stable Value portfolio, 6.8%; FCM/ GIC Stable Value portfolio from Fiduciary Capital Management, 6.7%; and Alliance Capital Management's Short Duration strategy, 5.8%.
bridgewater runs deep
For the three-year period, winning bond styles diversified further, with a customized strategy -- the Extra Long Duration Bond portfolio -- managed for a single client by Bridgewater Associates Inc. coming in first with a 14.8% annualized return. Second was Strong's high-yield strategy with a 9.7% annualized return and third was UBS/ Brinson's U.S. high-yield strategy with 9.1%. Fourth place was held by Providence Capital Management's U.S. Treasuries Active Fixed Income portfolio with an 8.6% annualized return and fifth was GMG/Seneca Capital Management's Value Driven Fully Disciplined portfolio at 8.5%.
Strong's high-yield management team rode out tough times for high-yield bonds in 1998 and 1999 by paying close attention to credit research and the relative value of high-yield securities within the marketplace, and by having a strong sell discipline, says Jeff Koch, portfolio manager and head of high-yield investments.
"If you have the ability to avoid big credit mistakes through strong initial research, you can avoid some disasters that pull down performance," says Mr. Koch from his office in Menomonee Falls, Wis.
Overall, Mr. Koch's team manages about $3 billion in high-yield strategies, about $150 million of which is invested for institutional investors in separate accounts.
While Bridgewater's Extra Long Duration portfolio held first place among managed accounts for the three-year period, it was 11th from the bottom of the quarterly Piper rankings and 12th from the bottom for the one-year ranking.
The duration of this fund causes the account to be heavily dependent on interest rates: the portfolio performs worst when interest rates rise and best when they drop, says Robert P. Prince, Bridgewater's director of research and trading.
The benchmark is customized, based on 25-year duration zero-coupon bonds. The manager aims to add 5 percentage points annually, he says.
The account was hurt by rising rates in 1999, but in prior years, rates had been dropping and the value added to the benchmark was 20%, which contributed strongly to the three-year performance.
Boston-based Loomis Sayles offers its medium-grade bond strategy in three vehicles -- a commingled fund, a mutual fund and separate account -- for a total of $17 billion, says Kathleen Gaffney, vice president, portfolio manager. She co-manages the mutual fund with Daniel Fuss, who is the sole manager for the commingled fund. Separate accounts using the medium grade strategy are team managed.
The 2.3% composite performance of Loomis Sayles' separate account portfolio, which placed fourth for the quarter among managed accounts, is a little lower than that of the commingled fund, the Fixed Income Fund, because of differences in the management agreements of individual separate accounts, Ms. Gaffney says. The commingled fund vehicle for Loomis Sayles' medium-grade style was first in Piper's quarterly rankings, 13th for the year and fifth for the three years.
The strategy is "plain-vanilla bond picking," says Ms. Gaffney. The strategy has a great deal of flexibility, which enables its managers to "go to where the best ideas are, where there's good value and good fundamentals," she says.
Much of the strategy's success in 1999 was driven by what its managers bought in 1998. That buying spree, in which managers snapped up bond deals in Korea, Thailand and other overseas markets, resulted in almost two-thirds of the fund's 35% maximum position in below-investment-grade bonds being invested in overseas markets.
The quarterly rankings of commingled bond fund managers were dominated by nine GIC managers. Following Loomis Sayles' Fixed Income Fund, with a 2.1% return, were: Pacific Century Trust's Defensive GIC, Norwest Bank's Stable Return Fund and Key Asset Management Inc.'s MaGIC Fund, all at 1.6%; and PW Trust Co.'s GIC portfolio, Mitchell Hutchins' GIC portfolio, Bankers Trust Co.'s BT Pyramid GIC Fund and National City Investment Management Co.'s Capital Preservation/GIC strategy, 1.5%.
For the year, Pacific's Defensive GIC Fund was tops with 6.5%, followed by Key's and Bankers Trust's GIC strategies, both at 6.3%. Norwest Bank's GIC pooled fund, 6.2%, and Mitchell Hutchins' and PW Trust's GIC funds, 6%.
For three years, the 7.2% return of Lipper & Co. LP's Intermediate Bond portfolio led the rankings. Tied with a 6.9% return were the Transamerica Bond Fund, Fiduciary Trust Co. International's Domestic Fixed Income Commingled Fund and the Bond Fund from St. Paul Trust Co. Loomis Sayles' Fixed Income Fund was fifth at 6.8%.
Janet Katakura has been managing the $200 million Pacific Century Trust Defensive GIC Fund since its inception in 1984 from her office in Honolulu.
Ms. Katakura added synthetic contracts to the style a few years ago, and those -- plus the Fed's increase in interest rates and widening spreads -- helped performance in 1999.
"What really helped was the terrible, terrible bond market last year. It was the worst I've seen in probably 20 years. The environment has been perfect for stable value funds," she says.
The best-performing commingled strategy over the three years was the Intermediate Bond Portfolio from Lipper & Co. in New York.
The fund benefited from the diversity of its more than 100 holdings, says Abraham Biderman, managing director and executive vice president.
The managers focus on credit and issues with intermediate duration, averaging between three and seven years.
The team used the last 18 months of a depressed bond market to clean out the portfolio and buy only the strongest credit issues, which left it "uniquely positioned to benefit from a rising bond market," Mr. Biderman says.
