Portfolio Manager Perspectives

Jeff Benjamin

What's attractive now: Higher-quality junk bonds

Payden's Sabur Moini sees fundamentals improving — and default rates plunging — for top high-yield corporates

Dec 15, 2009 @ 11:04 am

By Jeff Benjamin

Higher-quality high-yield corporate bonds are getting more attractive on a fundamental basis, according to Sabur Moini, manager of the $695 million Payden High Income Fund (PYHRX), offered by Payden & Rygel Investment Group.

“This has been a very strange and unprecedented market, but the fiscal and monetary stimulus we've had this year has been unprecedented as well,” he said. “Right now the high-yield market is getting healthier and that's when you want to get in.”

A year ago, when most markets were experiencing peak panic levels, Mr. Moini was going against the grain by making the case for a move into high-yield bonds.

“Nobody foresaw the massive rally in high-yield that we've had,” he said. “But last year we were telling clients the sell-off was technical in nature because a lot of the companies were still in good shape and were throwing off lots of cash flow.”

Just as the initial sell-off was technical and driven by broader economic influences, Mr. Moini said the high-yield rally this year has been mostly a high-beta technical move.

“We're now getting to the stage where fundamentals will start to improve,” he said. “The market has gone through a lot in the last 18 months.”

The fact that high-yield strategies have taken in more than $30 billion this year illustrates both an investor thirst for yield and the degree to which the market was oversold late last year.

“As the Fed and Treasury set up programs it has put liquidity into the market,” he said. “Right now you have high-yield funds yielding 8% while the short term interest rates are near zero.”

Mr. Moini, who invests primarily in high-quality double-B- and single-B-rated junk bonds, cites the direction of default rates as part of his case for higher quality high yield debt.

High-yield default rates are now around 12.5%, which is almost three times the historical average, but current defaults don't reflect the effects of the increased liquidity.

Mr. Moini expects high-yield default rates to be near the historical average of 4.5% within six months.

“The default rate is a trailing number,” he said. “A lot of companies have gotten a lifeline and already refinanced their debt.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives .


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