Michael Walls studiously avoids doing what everyone else does.
After high school in Topeka, Kan., most of his friends went to The University of Kansas. Mr. Walls opted instead for Denison, a small liberal-arts school in Ohio.
Once he got used to things there and had made friends, he opted to spend a year studying international business in Giessen, Germany.
“I am a strong believer that people have a tendency of getting into a comfort zone,” Mr. Walls said. “Whenever I found that happening, I would try to get out of that.”
Mr. Walls' life philosophy has translated into how he manages money. As the manager of the Waddell & Reed Advisors Municipal High Income Fund Ticker:(UMUHX) and the Ivy Municipal High Income Fund Ticker:(WYMHX), he has demonstrated an ability to diversify and pick credits that others might shy away from, said Robert Kane, founder of BondView.com, a free website for retail investors.
“He has a very diversified portfolio — buys revenue bonds from lots of different sectors,” Mr. Kane said. “You want someone like that who isn't going to just buy what everyone else buys, but also buys smartly.”
And both of Mr. Walls' portfolios are top performers. The Ivy fund reurned 6.96% in 2010 and ranked in the top 10% in its category for the past one, three, five and 10 years. The Waddell & Reed fund returned 5.34% last year and has ranked in the top quartile for the past one, three, five and 10 years.
While many managers will have as much as 5% to 6% of their portfolios in a position, Mr. Walls' maximum position is 2.5%. “I think if you make a good credit decision, 2.5% is enough to have a material effect on your performance,” he said. “We think we are going to make more right decisions than wrong ones, but if we are arrogant enough to say we are going to make all the right decisions all the time, then we shouldn't be in this business.”
Mr. Walls, 40, started his career as a risk manager for an insurance company, Cincinnati Financial Corp. As he got his master's degree in business administration, he continued to work there — eventually being promoted to a manager of the company's high-yield muni portfolio.
It's that background as a risk manager and an analyst that differentiates Mr. Walls from other portfolio managers, said Doug Nelson, an assistant vice president for investment analysis on Waddell & Reed Inc.'s municipal-securities team.
“Michael is willing to dig into deals and spend time on them that other managers aren't,” he said.
A few years ago, Mr. Nelson came to Mr. Walls with a deal for a hydroelectric plant that was very small but had an interesting story.
“It was a deal that a lot of people probably wouldn't have spent time on,” he said. “But Michael got it.”
When he is on the road, meeting with financial advisers, Mr. Walls tries to make it a point to meet with the management of companies whose bonds are in his portfolio.
For example, last year, he stopped by a Texas life care community and chatted with a manager.
“He began talking about how he was going to start charging residents to use the telephones, and that was going to provide revenue,” Mr. Walls said. “And I thought, "You aren't in the business of operating phones; you are in the business of life care.'”
Upon learning that the manager was spending cash without approval, Mr. Walls and his team went to the board, and the manager was removed.
Mr. Walls' willingness to look at issues that others may not means that he has significant holdings in nonrated bonds, offerings that tend to be small and thinly traded.
The Ivy Municipal High Income Fund is 39.4% invested in such bonds.
“I don't agree that all nonrated bonds are risky,” he said. Mr. Walls won't hold more than 50% of a portfolio in such bonds.
“A fund manager that manages high-yield bonds needs to just make sure that they aren't too far out on their skis,” he said.
E-mail Jessica Toonkel at [email protected].
