Pilgrim: Sticks to Pure High Yield, Increases Telecom
October 4, 1999
A "core philosophy" distinguishes the Pilgrim America High Yield Fund: investing in the core of the high yield market, buying domestic cash pay securities, and avoiding any of the more esoteric coupons like deferred interest bonds or payments in kind.
The fund is one of several high yield mutual funds managed by the Phoenix-based Pilgrim America Group. Kevin Matthews, senior manager, joined Pilgrim in July 1995 to begin the fund with $16 million in assets. Joined by portfolio manager Charles Ullerich one month later, the two have watched their fund grow to $400 million in assets over the last four years.
"We focus on the core of the market. If someone wants to buy high yield, this fund is great because it's invested in high yield. That sounds silly to say, but unlike many high yield funds, we're not invested in emerging markets, converts, preferred stock or developmental zeros," Ullerich said.
Instead, the fund closely mimics the benchmark allocation of the Bear Stearns index, and makes only occasional sector allocation bets. While the fund will overweight in certain sectors with positive trends, Ullerich insists "we don't aggressively overweight to become a more focused fund."
The Pilgrim Fund holds positions in diverse sectors such as basic materials, energy, telecom, media, leisure companies. Specific holdings include Bally's Total Fitness, Granite Broadcasting, Salem Broadcasting and Charter Communications.
Given the current market, Ullerich said the fund likely will begin weighting more heavily in telecom. Credit spreads in that sector have widened significantly in the last few months. Williams Communications, for example, began trading in the low 9% range and now hovers around 11%. He also said the fund would begin to look into sectors that are currently out of favor, such as health care and movie theater chains, because those "do come back over time."
Company Specific Stories Are Key
More important than the type of industry, though, is the individual strength of the company issuing high yield bonds. Ullerich focuses on the key metrics of the company and looks carefully at the company's management - its history as well as its financial performance and the stability of that performance.
The fund will only invest in companies in business three years or longer, in one form or another. That still allows the fund to invest in some new and emerging types of telecoms - those backed by larger companies, like Hyperion and Nextlink - or those with a strong revenue base such as Williams Communications. Level 3 Communications, with its huge equity capitalization, is another of Pilgrim's telecom holdings.
Conversely, Pilgrim Fund avoids more developmental telecoms, those without a management history or thinly capitalized companies. Pathnet, for example, is a name Ullerich would avoid.
Because of its strict focus on the core of the high yield market and its leanings toward stronger companies, most of the Pilgrim Fund's holdings are single-B issues. On occasion, the fund will invest in double-B issues. Here again, the fund mirrors the Bear Stearns index.
As of Sept.16, 59.5% of the index was in single-Bs. Another 25% was in double-Bs, though Ullerich says the fund holds less than that percentage of its assets in double-Bs. Nearly 12% of the index is held in triple-Cs, and the Pilgrim Fund tends to veer in that direction in its telecom holdings. The balance is a reflection of "what's been brought to the market in new issuance," Ullerich said.
Not Trying To Be The Hero
Despite its protective bent, Pilgrim, like many high yield funds, has taken a number of hits in recent months. One of its biggest losses, though not as bad as it could have been, came about a year ago, when it sold out Favorite Brands International's bonds in the 80s and 90s. Favorite Brands, a competitor of Brach's Confections Inc. that makes candy and marshmallows for supermarkets under the Farley's brand name, had a string of disappointing quarters.
Ullerich's team lost confidence in the company's management and their ability to successfully pull together trade money, the promotional money paid out to supermarkets to put their product in special locations. Favorite Brands filed for bankruptcy earlier this year.
"When we have companies that get into trouble, we have a history of admitting our mistakes and not trying to be heroes about it," Ullerich said.
Year to date, the Pilgrim High Yield has posted a loss of 0.07%, according to figures provided by Lipper Inc. The fund ranks 248 out of 329 funds on the Lipper index.
Ullerich still expects to post good numbers partly due to his long-term investment horizon. He holds on to issues for an average of nine to 12 months. But, he acknowledges, "we are constantly reevaluating: is this the same company we bought into? Or, more technically, is this bond more attractive relative to others?"
Like many portfolio managers, Ullerich is uncertain what the high yield market will look like for investors over the next six to 12 months. He expressed concerns regarding the interest rate, the relative weakening of the dollar, and inflationary pressures creeping up on commodity indexes. But, unlike many, the Pilgrim Fund has not been plagued by a surge of capital outflow.
Even with heightened fears over Y2K, Ullerich remains undaunted.
"There is a valid concern [whether] the past is any indication of the future, but we shouldn't be hit so significantly. Even if Y2K doesn't hit us directly, indirectly, people might pause to put money in the market, but we won't see until year-end what happens," he said.