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SPRING 2003

INVESTING FOR GROWTH/Online Extra

Q&A with Joan Payden
The Payden & Rygel bond whiz advises investors: "It's important to be very well diversified"


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Bonds have outpaced stocks for three years running. But with yields on many fixed-income securites now at their skimpiest levels in decades, investors wonder whether bonds have any juice left. To find out, BusinessWeek Personal Finance Editor Susan Scherreik recently spoke to Joan Payden, chairman of Payden & Rygel, a 20-year-old Los Angeles money-management firm with $50 billion in assets. Most of Payden's clients are pension funds and other institutional investors.


However, for as little as $5,000, individuals can invest in any of the firm's 16 no-load bond funds, including the flagship $400 million Payden Core Bond. Although modest in size, the fund boasts an averaged annualized three-year return of 10.13%, among the best bond-fund records around. Following are excerpts from the phone interview with Payden:

Q: Do you think interest rates will decline further?
A: The threat of deflation is serious enough that the Federal Reserve might lower short-term interest-rates one more time. If that happens, bond prices will rise.

Q: Where are you seeing good value in the bond market?
A: High-yield bonds, but not the high-tech and telecom issues that have been so problematic. There are a lot of smaller companies in the high-yield bond arena that make mundane things, like rubber gloves or envelopes, which have credit ratings just below the investment-grade cutoff. Because they're small, maybe new, these companies have had to go to the marketplace and pay 8% to 12% yields for their money. You could call them a sort of higher-grade high-yield bond.

Q: What about Treasuries?
A: Although the yields are near record lows, they still afford that safety factor. If something happens in the world, there's always a flight to quality.

Q: What else do you like?
A: In the high-credit quality arena, I like mortgage-backed bonds, especially Ginnie Maes. They yield about 2.5 percentage points more than comparable Treasuries but are backed by the full faith and credit of the U.S. government.

Q: Any sorts of bonds you don't like?
A: I think many investors don't realize how risky investment-grade corporate bonds are. You have to worry about credit quality, which you never did 10 years ago. Today, most of the problems in the bond market have been in high-quality bonds -- your Enrons, your WorldComs, your Tycos, and so forth.

Q: What can bond investors do to protect against risks?
A: It's important to be very well diversified. I would put over half of my portfolio in a core bond fund that buys Treasuries, mortgage-backed securities, and investment-grade corporates. Then I'd split the rest between a fund that invests in high-quality bonds that mature in two years or less, and a high-yield bond fund.

Q: What kind of returns can investors expect from the portfolio you describe?
A: A reasonable-case scenario would be 6% to 8% if interest rates hold steady. If the Federal Reserve lowers rates slightly, then you would probably earn about two percentage points more than that. Conversely, if rates rise, you could expect a total return of about 4% to 6%.

MARCH 24, 2003




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