Few strategies outside of inflation protection saw positive returns for the year. The median return for TIPS strategies in Morningstar's universe was -2.8% for the quarter and the median return for the one-year period was 4.5%; the median return for domestic high-yield strategies was -3.9% for the quarter and 0.14% for the year; the median return for long-duration bond strategies was -10.9% for the quarter and -13.2% for the year; and the median return for Morningstar's entire domestic fixed-income universe was -4.1% for the quarter and -2.7% for the year ended March 31.
The Laffer Tengler Dynamic U.S. Inflation strategy led the list of one-year returns with a gross 19.6% for the period ended March 31 and was in ninth place among five-year returns with a gross annualized 6.47%. All multiyear returns are annualized.
"It's called 'dynamic' and 'U.S. inflation' for two reasons," said Arthur Laffer Jr., the Nashville, Tenn.-based president and senior portfolio manager at Laffer Tengler Investments Inc. "One, the portfolio looks at the macro environment and is designed to dynamically move between the no-inflation and inflation portfolio orientations. It might hold a little bit of equities, or something on the margin as an alpha play, but for the most part, it's kind of a standard, boring, middle-of-the-road, fixed-income portfolio. The other portion of the 'dynamic' is that because inflation is the actual trigger to the strategy, if inflation picks up, the portfolio is literally designed to morph into an anti-inflation portfolio and dynamically allocate to different investments as inflation persists or moderates over time."
Mr. Laffer said the strategy started shifting into more inflation-protected securities starting in March 2021 despite the Fed's position, at that time, that rising inflation would be "transitory." The portfolio shifted more significantly toward that direction in May and June of 2021, holding that positioning through the end of the year and into the first quarter of 2022.
"I'm not going to argue whether 'transitory' was correct or not. I'm just looking at facts and saying inflation really is picking up," Mr. Laffer said. "And inflation is one of those things that, typically, when it starts to move, it's really hard to stop it."
"Conversely, if inflation starts to moderate and come back down, this portfolio is going to start shifting back in the other direction. So it's dynamically meant to move in and out of low-inflation, or into a high-inflation portfolio," Mr. Laffer said.
Quantitative models that are responsive to changes in the macro environment, such as inflationary pressure, are "scaffolding" for the dynamic strategy, he said, but other inputs also influence the portfolio's position over time.
"For example, I don't have a Ukraine, or a 'war in Europe' model. But I do look at the news and I look at what's happening. And I look at what the model wants to tell me under, let's say, an optimal environment. And then we move the allocations and the different investment themes around within that context," Mr. Laffer said.
The portfolio benefited in the past year from early positions in energy, he said, along with allocations to precious metals and industrial metals. Mr. Laffer said he likes investment-grade credit, as well, especially if the economy starts to slow down. But he doesn't like the exposure to rates in the current environment.
16th Amendment Advisors LLC's Vicksburg strategy, which led the list of returns in the previous two quarters, dropped into second place with a gross 19.15% return for the year. The strategy remained on top of the overall domestic five-year list, with a 32.86% gross return for the five years ended March 31.
The Vicksburg portfolio, which is in Morningstar's U.S. municipal national long-term bond category, holds taxable and tax-exempt investment-grade municipal bonds, corporate bonds and their hedges as a total return institutional fixed-income strategy, according to the strategy's Morningstar fact sheet.
Thomas J. Herzfeld Advisors Inc.'s fixed-income composite was once again in third place on Morningstar's one-year list with a gross 10.04% return for the year. The strategy was in second place on the five-year list of returns with a gross 10.06%, rising from third place at the end of the previous quarter.
Erik Herzfeld, Miami Beach, Fla.-based president and portfolio manager, said the portfolio was already positioned to be interest-rate and inflation sensitive throughout the second half of 2021. "We didn't do much maneuvering in the first quarter (of 2022). It was all done kind of behind the scenes, basically in the fourth quarter of last year," Mr. Herzfeld said.
The fixed-income composite followed the same themes of low duration and short maturities going into the first quarter of 2022, he said, keeping the portfolio overweight floating-rate securities.
With floating-rate securities, "if interest rates went up, it wouldn't affect us. And we decided to put on a little inflation hedge, a Treasury hedge so to speak, because of what we saw as a massive sell-off in 10-year (Treasuries)," Mr. Herzfeld said.
The short Treasury position, achieved by using exchange-traded funds to sell futures, overperformed and offset the impact of widening credit spreads in the first quarter, he said.
Herzfeld's portfolio also benefited from tactical allocations to energy, as portfolio managers saw new energy enterprises as an underinvested area due largely to environmental concerns, Mr. Herzfeld said. "And energy debt tends to be higher yielding."
Mr. Herzfeld said 2022 began "like a gigantic vacuum cleaner. The Fed, they're sucking all the liquidity, or the air, out of the room and if you're not positioned to deal with an environment where derisking and illiquidity are taking place, you're going to get in big trouble. And I think that's the most important thing to take away. That this is that type of year."
A gross 7.35% return put Pacific Investment Management Co. LLC's real-return asset long-duration strategy in fourth place for the year and a gross 8.1% placed the strategy third for five years. PIMCO's strategy is in Morningstar's U.S. inflation-protected bond category.
L&S Advisors Inc.'s short-duration high-yield strategy rounded out the top five for the year ended March 31 with a gross 7.25% return.
For the five years ended March 31, Artisan Partners Asset Management Inc.'s high-income strategy held the fourth spot with a gross 7.35%, followed by Mesirow Financial Investment Management Inc.'s high-yield strategy in fifth place with a five-year gross return of 7.26%.
All of the top 10 spots for the year in Morningstar's domestic collective investment trust universe were held by inflation-protected bond strategies, up from five at the end of the previous quarter.
Two non-lending TIPS index bond CITs from Northern Trust Asset Management topped the list with net returns of 4.68% and 4.62%.
PIMCO's Real Return Collective Trust II was third for the year with a net return of 4.51%. Prudential Financial Inc.'s Inflation-Protected Securities 1 was fourth for the year with a 4.4% net return. BlackRock Inc.'s U.S. Treasury Inflation-Protected Securities F rounded out the top five with a 4.31% net return for the year ended March 31.
Long-duration strategies continued to dominate the five-year list in the CIT universe for the period ended March 31. Down from holding all 10 spaces for the five years ended Dec. 31, six were long-duration portfolios at the end of the first quarter of 2022.
A net 6.04% return for five years lifted Fidelity Institutional Asset Management's Long U.S. Treasury STRIPS Pool index fund into first place from second at the end of 2021.
Meanwhile, Legal & General Investment Management America Inc.'s Long Liability Treasury 2X CIT fell to second place with a net return of 5.71%.
Prudential Financial had two strategies among the top five. Prudential's High Yield Fund 1 held the third spot with a net return of 5.84%, and the firm's U.S. Long-Duration Corporate Bond 1 portfolio was in fourth place with a five-year net return of 5.81%.
LGIM's Treasury 15+ STRIPS CIT completed the top five for the five years ended March 31 with a net return of 5.44%.
All data for Pensions & Investments' top-performing managers report are provided from Morningstar's global separate account/collective investment trust database. Data for the rankings on which this story is based were pulled May 4.
