Higher Credits, Lower Defaults, And Lots of Telecom
November 15, 1999
With one hand in U.S. corporate issues and the other in emerging markets debt, portfolio manager Tim Norman of the Phoenix-Goodwin High Yield Fund sees himself as an aggressive, but cautious, market player.
He plays the high yield market strategically, having played defensively over the last six months against a risky, default-ridden market and positioning himself for a recovery in credit quality in the first half of 2000.
"We've made a number of strategic moves in 1999 that I think enhanced our performance, and our performance numbers have been attractive relative to our peers," said Norman, whose $486 million portfolio ranks 45th among the 337 mutual funds in its class, according to Lipper Inc.
"In the second half of 1999, we made a concerted effort to upgrade and raised cash in July and August to the 8% level, the highest cash position we've had in the fund, just in anticipation of what we perceived to be a weaker third quarter and concerns over Y2K," Norman said. "In effect, we lowered our risk profile and avoided poor-performing sectors and issues. Playing defensive probably helped our overall performance during the last six months by basically staying out of trouble."
In fact, Norman's fund has seen a relatively low default rate, less than 3%, while the overall default rate on high yield issues stands at 5.79%, according to Moody's Investors Service. He credits his success to investing only in middle-B issues and carefully weighting his portfolio against under-performing sectors - trimming back energy holdings and relying on telecoms with strong underlying assets.
"Certainly, [the default rate] is one of the reasons why I upgraded the portfolio. There's definitely a premium in the high yield market that's been built in for the overall deterioration," Norman said. "We've seen a rising default rate, and certainly the upgrade/downgrade numbers have been skewed toward the downgrades for the last six months. Overall, risk is rising."
Still, Norman is expecting to approach the market more aggressively over the next six months. While his cash reserves now stand at 6.5%, he plans to lower that figure to 2% to 3%. And, while cash outflows have totaled $50 million year-to-date, the fund has seen an inflow of $13 million over the last three weeks.
"I think some of the more aggressive high yield investors that try to time the market are starting to get back in, perhaps setting back up for 2000," he said. "We've got money coming back into the markets and typically, the mutual funds are spending."
Telecom Scores Big Hits
While Norman has avoided those sectors that "really took it on the chin over the last six months," including healthcare, movie theaters and global satellite operators, he overweighted his portfolio in telecom, scoring a few big hits in the last few months.
Currently, 27% of the Phoenix Fund's assets are invested in four types of telecom companies: wireless, competitive local exchange carriers (CLECs), Internet/data, and long distance and international telephone carriers. Its wireless/PCS holdings include Clearnet, Nextel Communications, and Telecorp Triton. In the Internet and data sector, Norman is partial to PSINet and Split Rock.
And FirstCom - a CLEC based in the U.S. but with operations in Chile, Peru and Colombia - is one of Norman's biggest holdings, as well as the best-performing name in his portfolio year-to-date.
FirstCom's bonds have risen more than 30% this month alone, after AT&T announced that it planned to form a new public company, AT&T Latin America, by merging the operations of FirstCom and Brazil-based Netstream. The new venture is expected to reach 70% to 80% of the business market in these four countries, and former FirstCom shareholders will own approximately 34% on a fully diluted basis.
"We've had a very successful tender with FirstCom," said Norman. "They have what we look for in telecom - good management and control of their assets, very much an end-user focus, particularly on the business sector, decent liquidity and they're building their own networks."
While Norman has been actively trying to bring down the number of CLECs in the fund, he has favored an increasing number of long distance and international telephone companies, including Alestra in Mexico.
Tight Liquidity In Emerging Markets
Other emerging market issues have been just as rewarding for the Phoenix Fund. The fund has invested up to 16% of its assets in emerging markets corporates since the early 1990s. About one-third of its emerging markets holdings are in Latin America, and another one-third in Poland, while the remainder is in Asia, the Bahamas and Greece. Norman focuses on Latin American cable companies like Argentina-based Cable Vision and Multi Canal and Brazil-based Global Par.
"Typically we choose the same types of companies with the same set of characteristics," said Norman. "Liquidity sometimes gets tight in some of the corporates, so if you buy it, you really need to like it because you really don't get to trade it too often."
Some emerging markets issues, however, have been the biggest losers in Norman's portfolio. One of this year's biggest losers was a Thai steel company now in bankruptcy, NSM. This investment was a new project financing plagued with problems from the outset - a lack of due diligence by the project's initial underwriters and a failure on the part of the company's management team to carry out its business plan.
"We got dinged, but we're certainly below the market average on defaults," said Norman.
Year to date, the Phoenix Fund has posted a return of 4.92%. Over the last year, the return was 10.15%, and over the last three years, 4.87%.