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Chicago) "Corporate bonds have the stock guys salivating," according to Morningstar's Russel Kinnel, while attending the 2009 Morningstar Investment Conference (held May 27-29 in Chicago). And fund managers have been "finding great buys in the bond world. A couple months ago yields peaked in the hefty double-digit range and many are still offering sizable yields," says the director of mutual fund research for the independent research firm.
As for corporate bonds, they seem "like a more natural fishing pond for stock managers," Kinnel notes. "They're just expanding the reach of their research and moving along the capital structure to find the most attractive spot to invest."
Marty Whitman, manager of Third Avenue Value (TAVFX), told attendees that he has been buying the bank debt of companies that look poised to pay off in the long run, while Steve Romick of FPA Crescent (FPACX) has done a lot of bond buying.
Bruce Berkowitz of the Fairholme Fund (FAIRX) says that bonds are very inexpensive and some senior bonds have double-digit yields. And while those at Morningstar's recent meeting may have found reasons to warm to bonds, they got a downright chilly viewpoint on the industry's performance in '08 and the government's behavior.
'Reflections and Outrage'
Bob Rodriguez, who manages FPA Capital (FPPTX) and FPA New Income (FPNIX), and plans to take a sabbatical next year, shared his displeasure over the industry's failure to note and respond to the housing and credit bubble. Fund managers are too afraid to lag their benchmarks and hence won't retreat to cash or make strong bets against the major market indexes, he noted in his speech, appropriately entitled "Reflections and Outrage."
"Did the industry try and prepare for this tsunami of a credit debacle? I don't think so," asks the head of First Pacific Advisors. "Whether in stocks or in bonds, it seems as though the same old strategies were followed — be fully invested for fear of underperforming and don't diverge from your benchmark too far and risk index tracking error.
"The industry drove into this credit debacle at full speed. If active managers maintain this course, I fear the long-term outlook for their funds, as well as their employment, will be at high risk," Rodriguez adds. "If they do not reflect upon what they have done wrong in this cycle and attempt to correct their errors, why should their investors expect a different outcome the next time?
"Investors have long memories, especially when they lose money," the fund manager notes.
"We owe our shareholders more than platitudes if we expect to regain their confidence," he says, sharing that he's put some of the cash he was holding last year into energy stocks. He sees energy prices as rising long term.
Rodriguez also shared his concerns over credit, housing, mortgage and emerging markets in the recent past and has altered his portfolios accordingly. He expressed his severe lack of trust in most segments of government because of the course of financial events since 2000.
The fund veteran sees the federal debt increasing rapidly, predicting it could hit about $15 trillion or more by 2011. This means the United States will have to borrow more money from abroad and print more money, so he's not buying long-term Treasuries.
He is cautious about the current rally, seeing investor optimism as misplaced.
"What new procedures and policies have they implemented at their firms to address this new environment and protect them from making similar mistakes in the future? I believe these are questions that must be answered in order to regain and retain investor trust," Rodriquez emphasizes.
Some of his other key points:
o Having the courage to be different comes at a steep price but can result in deep satisfaction and personal reward.
o Superior long-term performance is a function of a manager's willingness to accept periods of short-term underperformance, and this requires the fortitude and willingness to allow one's business to shrink while deploying an unpopular strategy.
