Loomis Sayles Sees Value Amid The Chaos
November 1, 1999
Gary Goodenough said he still sees good value in the high yield market, although this year, admittedly, it has been tough to find.
Goodenough, a vice president and member of Loomis Sayles' Core Bond Group who manages its $155 million New England High Income Fund, acknowledged that this year has been rockier than earlier periods. But the market fundamentals are still good, he said, and there is still value to be found lurking behind the shaky investments.
His investment strategy hinges on research and patience. The fund tries to be opportunistic, he explained, by buying not just high yield, but "very high yielding" notes from issuers with improving credit profiles.
Goodenough has plenty of motivation to do so. He pays out a 10.8% dividend to investors in his fund, so he's looking for returns on his investments to fund at least that amount.
So while most investors are looking at the higher-rated deals in the market, he has to find value in lower-rated names.
"You can't be buying double-B's and pay 10.8%," he said.
To be sure, the dividend is variable, so in theory the fund could set it lower. But over the past three-and-a-half years, the dividend has been increased four times, Goodenough said.
Bias Toward CLECs, Paper
So what does Goodenough look for to pay that 10.8%?
He looks for the same things as do most portfolio managers: strong market positions, corporate expansions, industry consolidations, and strong equity sponsors.
Telecommunications, particularly the competitive local exchange carriers, have many of those aspects, he said, which explains why 17% of his fund is invested in telecom.
Another 14% of his assets are in cable and about 17% are in foreign issues, with even a few corporate issues from emerging markets (although all the issues are dollar-denominated).
Indeed, foreign investments have dipped over the course of the year, he said, as the Russian default coupled with the collapse of Long-Term Capital a year ago widened spreads dramatically.
But foreign risk notwithstanding, he does not rule out any possibilities when looking at potential issues because any one of them may have the improving credit story he seeks.
And to find them, he places a strong premium on his in-house research.
There are nearly 65 pros in a research capacity at Loomis, and while not all of them focus on high yield debt, Goodenough said the overall number is illustrative of the research mindset there.
Another industry he likes is the paper and packaging industry, as evidenced by holdings in Stone Container and Packaging Corp. of America. Overall that sector has 7% to 8% of his assets.
Stone is paying a 12.25% coupon, and Goodenough is expecting those notes to be called at par, he said. Stone also has seen some credit improvements over the past year by way of debt reductions of more than $1 billion in the first six months of 1999. The savings stemmed from the company's merger with Jefferson Smurfit Corp. in November 1998.
Added to the 12.25% coupon was a price appreciation in trading values, Goodenough said, which parlayed into a 25% return in 1999.
Packaging Corp. postponed its initial public offering just last week and consequently the issuer said it also will not redeem its outstanding 12.375% preferred stock, which Goodenough owns in his portfolio.
However, he maintained that the IPO will surface again, and when it does his investment, for which he paid par, will be a gainer.
Uphill Battle For Returns
His return so far this year - 1.37%, according to Lipper Inc. - may not be enough to get excited about, he said, but in the current environment, being in the black at all is a good sign. That's no exaggeration when considering that this year has been the second-worst of the century - next to 1994 - for Treasurys, Goodenough said, while most stocks on the New York Stock Exchange have actually lost money this year.
"How can high yield perform, when stocks and bonds struggle?" he said. "Where is the confidence in that?"
Yet, there is still value in high yield; in fact, excellent value is how Goodenough phrased it. And that stems from the buzzing economy that underscores that stock market plus the good fundamentals at many of the issuers, he said.
Goodenough has raised the cash level in his portfolio substantially in recent months, he said, to about 10%. Typically, he would keep cash at about 3% of assets.
The reason follows his value strategy. He feels that value will increase in the near future for high yield and he wants to have cash on hand to take advantage of buying opportunities down the road.
He has shortened the average maturities in his portfolio, as well, he said.
Goodenough's return for the previous 12 months was 7.61%, and the 36-month return was 5.17%, according to Lipper.