Baby boomers creating opportunities

NEW YORK — The ever-evolving need for assisted-care facilities for the elderly and increased concern over energy policy have created opportunities for municipal bond portfolio managers.
MAR 12, 2007
NEW YORK — The ever-evolving need for assisted-care facilities for the elderly and increased concern over energy policy have created opportunities for municipal bond portfolio managers. As baby boomers move closer to retirement and champion alternate sources of crude oil, both areas are becoming an increasing source of municipal debt, said Ronald Fielding, the founder of The Rochester Funds. Mr. Fielding, who manages 18 funds for the Rochester, N.Y.-based division of OppenheimerFunds Inc. in New York, said that both investments have great future growth potential, as they are among the highest yielding and are available within a manageable portfolio size, despite carrying significant risks that would be evaluated on a project-by-project basis. Defaults expected “There have been and will be more defaults in these areas,” he said. “They are tricky and are both intriguing.” The bonds, which usually come non-rated or triple-B-rated, have proliferated as credit spreads have narrowed considerably and as bond fund managers have become more familiar with such issues. “We are seeing issues come to market on a weekly basis, because there is a need to meet the consumer demand,” said Jane McCart, senior vice president and portfolio manager at Northern Trust Corp. in Chicago. “You are seeing more of that, because the number and the acceptability of those projects has increased quite a bit as more people are looking for senior assisted-care facilities as they age.” Northern Trust had $697 billion in assets under management as of Dec. 31. Mutual funds, arbitrage and hedge funds have the greatest interest in high-yield municipal bonds, with a small percentage of the interest coming from retail and individual investors, Ms. McCart said. “Mutual fund and insurance companies, and some from hedge funds, mostly invest in these facilities,” aid Dan Solander, director of municipal bond management at Lord Abbett & Co. LLC in Jersey City, N.J., which managed $112 billion as of yearend. Assisted-living facilities for the elderly are increasing in demand and sprouting up in some less expected locations. The facilities, which cost between $20 million and $200 million to build, typically are associated with Florida or Arizona but are sprouting up in areas such as the Carolinas, Maryland, New Jersey, Sea Island, Ga., and Chicago’s Gold Coast. The types of facilities can be broken down by type: independent-living facilities, assisted-living facilities and nursing homes, Mr. Solander said. Alternative energy also has grabbed the interest of a growing number of investors in search of strong speculative investments. Some of the projects, which are supported by government subsidies, include converting cow manure into methane, and switch grass or corn into ethanol, in states such as Iowa, Mr. Fielding said. “We believe the government will continue to subsidize alternative-energy plants, and we believe that the typical 7% yield makes a good return for our fund,” he added. Ethanol has taken off. Thanks to the Energy Act of 2005, which created a renewable fuel standard, the amount of biofuel sold in the United States — which stood at 3.9 billion gallons at the end of 2005 — is expected to increase to 7.5 billion gallons by 2012, according to data from the Washington-based Renewable Fuels Association. An alternative-energy analyst at a bond-rating agency said that the bonds average a low- to mid-B rating. “There is so much capacity coming on — and a lot of it is bank debt financed — but I don’t have a good feel for where the debt is coming from,” said the analyst, who asked not to be identified. There currently is a capacity for 5.6 billion gallons of ethanol, with another 6 billion gallons of capacity under construction, according to the RFA’s website.

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