Small fund nimble enough to navigate the edges of fixed income

Leader Total Return Fund manager goes off the beaten path to make nimble bets on market and rate patterns

Apr 16, 2014 @ 1:14 pm

By Jeff Benjamin

When navigating fixed income, John Lekas is not shy about straying off the beaten path and he acknowledges the smaller size of his fund has its advantages.

Mr. Lekas, president, chief executive and senior portfolio manager at Leader Capital Corp., is separating from the pack with his Leader Total Return Fund (LCTIX).

The fund, launched in July 2010, has a five-star rating from Morningstar Inc. and is leading the intermediate-term bond fund category year-to-date, as well for the one- and three-year periods.

While he manages $1.2 billion in total assets, the $155 million fund is taking advantage of its size to make nimble bets on market and interest-rate patterns that have, so far, been paying off.

InvestmentNews: How are you achieving the outperformance in your Total Return Fund?

Mr. Lekas: By staying with corporates. That has been paramount. And by managing for a rising-rate environment. We've done that differently than the competition. Instead of buying Libor paper, we've been buying 10-year [corporate] floats.

In 2011, when Europe fell apart and interest rates went down, there was a basket of [corporate] bonds called 10-year floats, all issued by big-cap companies. The yields were tied to the 10-year Treasury.

After Europe, there was a flight to quality that moved the yield down on the 10-year. We didn't think it was going any lower than that and we put 15% of the portfolio in the [corporate floats].

(See also: Worried about stocks? High-yield bonds have room to run)

InvestmentNews: How much risk are you adding to your fund for the additional return you're generating?

Mr. Lekas: We're going to take on more credit risk because we're not buying U.S. government Treasuries. But the risk-versus-return has been terrific.

We're in the business of assessing risk-versus-return. And I think we're better at it than anybody in our space.

InvestmentNews: What is your particular aversion to owning Treasuries?

Mr. Lekas: On a historical basis, we think rates go up significantly and the rate risk is far greater than the credit risk out there at this point.

We're primarily in investment-grade corporates and the deleveraging in that space is phenomenal. Whereas governments continue to just issue more debt, those corporate balance sheets are more intact. Just look at the banks, and how much more they have to keep on their balance sheets now. That means even more for sure that we're going to get paid.

Right now, 40% of our exposure is to banks.

Ultimately, we think the dollar breaks here, which will be the catalyst to pole-vault interest rates higher.

InvestmentNews: What happens to your strategy in a rising rate environment?

Mr. Lekas: We've been put to the test already, 120 days ago when we saw rates rise. The 10-year floaters have negative duration, unlike bank loan funds that are simply tied to Libor. We get a hedge and a price appreciation in rising rates. The proof is in the pudding.

We're using that as our ballast, and we think that is a way smarter bet than going to Libor.

InvestmentNews: If this is such a good strategy, why aren't other bond fund managers doing this same thing?

Mr. Lekas: For a lot of funds, they're just too big to do what we're doing.

The Pimco Total Return Fund, which is managing $230 billion, has two problems. They are stuck buying U.S. Treasuries, and they're loaded up with illiquid derivatives and options.

When they get redemptions they get whacked twice.

We can take our strategy to $8 billion or $9 billion and still have the flexibility that we need.


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