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Q&A: A Quick Portfolio Fix For A Slowing Economy (Extended)


BusinessWeek Investor: Bonds

Q&A: A Quick Portfolio Fix for a Slowing Economy (extended)

One bond bull makes the case for corporate debt

Metropolitan West Total Return Bond Fund (MWTRX) is the bright new kid on the bond block. This no-load fund boasts the best three-year record for an intermediate-term bond fund, with an average 7.38% annual return in the three years ended Oct. 20. The fund is up 7.09% so far this year, better than 67% of its peers, according to Morningstar. Thanks to strong performance, the fund's assets have jumped from $150 million a year ago to $680 million, 68% of which is in institutional accounts. The fund is managed by Laird Landmann, Tad Rivelle, and Stephen Kane, who met at bond-fund powerhouse PIMCO a decade ago and formed their own bond shop four years ago. Personal Finance Editor Susan Scherreik recently spoke to Landmann, 37, from his office in Los Angeles.Q: Will bonds continue to outperform stocks?A:They have a good shot at doing so if the economy continues to slow, which we believe will be the case.Q: How will this play out?A:We're already seeing companies having a tough time meeting their earnings estimates, and that will continue. As a result, stocks with lofty multiples will fall back to earth. But you can buy high-quality corporate bonds yielding 8% to 9% right now. If the Federal Reserve lowers interest rates--which we believe could happen early next year--you will earn more than that 8% to 9% coupon because bonds will appreciate in price.Q: What sectors of the bond market do you favor?A:We are value investors, and that's led us to the corporate bond market, where prices are the lowest they've been relative to Treasury securities in 15 years. For instance, a 10-year Ford Motor Credit bond yields around 8%, vs. 5.65% for a 10-year Treasury. You're getting paid a phenomenal amount of additional yield for taking on the risk of a company like Ford Motor. We have 35% of our assets in the corporate sector.Q: Why are corporate bonds so cheap?A:An uptick in corporate bankruptcies has created an almost panic situation. Investors have priced corporate bonds as though the economy is headed for a bad recession. If you actually get to a point where there is a recession, and it turns out to be less severe than people think, then the prices of these bonds will improve.Q: Is a recession in the cards?A:I don't think we're headed for a hard landing. But economic growth will slow over the next six months. As stocks decline, consumers won't feel as flush, and they'll pull back on spending. Also, it will be tougher for small and medium-size businesses to get loans to expand their businesses.Q: What other types of bonds are you buying?A:We like asset-backed securities, especially securitized airline leases and securitized home-equity loans. They are yielding two to three percentage points more than comparable Treasuries.Q: What else do you like?A:We own inflation-indexed Treasury bonds because they are a great way to diversify a bond portfolio. Unlike most bonds, they perform well when inflation rises. So they act as a natural hedge. These bonds are also attractively priced right now. Their prices reflect expectations that inflation will run at a less than 2% rate over the next 10 years. That's unlikely, since the historic rate of inflation is around 3%.


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