Dineen is a portfolio manager of high-grade bonds at MONY Life Insurance in New York, and one of six managers reporting to Greg Staples, who heads the fixed income group. Dineen helps manage $5 billion in taxable funds that also include asset-backed securities, mortgage-backed securities and Treasuries. A graduate of Pace University in New York, he received his Masters in Business Administrated from Sacred Heart University in Fairfield, Conn. He is a Certified Public Accountant and a Chartered Financial Analyst.
Q: How is your fund structured?
We have a $5 billion general account with a buy and hold strategy that includes many large single-A rated corporate securities. Five years ago we took $350 million out of that account to run an active total return portfolio against the Lehman Brothers Intermediate Corporate Index. Last year, we outperformed the index by 246 basis points and over a three-year and a five-year time horizon we out-performed the index by 85 and 27 basis points, respectively. The active fund is sector-oriented, with relative value plays on both a sector and an individual basis. We don't take duration bets and for the most part just hug the index.
Q: What is your take on last year's market?
A major theme in 2000 was illiquidity and declining credit quality. For example, negative profit warnings in areas such as auto parts and banks would generate exaggerated sell-offs due in part to illiquidity. There were these multi-billion dollar companies with the littlest bit of asbestos exposure and everyone would sell the bonds. We try to look through the cycles of the market, to see beyond the temperamental ups and downs and focus on the fundamental issues. Last year both the investors and the dealers were on the same side, everyone was risk-averse. Often dealers would maintain low profiles and many securities got locked up.
Q: What do you foresee for the market this year?
This year strong technicals are outweighing weak fundamentals. We're going to see a lot of refinancing and demand is outweighing supply. The secondary market is very thin; from my personal view there is a stale line-up of the same old securities. Therefore, there is a large premium on new supply, and many of these deals are sizeable, so they're priced cheap to clear the market.
Unlike the secondary market, the new issue market is red hot. If it continues to do well it will facilitate the secondary market flow. We'll start to see weaker credits tighten, such as auto parts and telecom. ConAgra Foods has just gapped in with a secondary offering of 170 basis points off the 10-year Treasury and is now at 128 off. The good quality securities are just tightening in front of our face.
Q: What credits have you been looking at as of late?
The most advantageous way of increasing corporate bond exposure is through the new issue market, and using our cash on the sidelines, that's what we've been looking at. In December we liked good quality names such as Unilever and Alberta Energy. Domestic energy credits such as Conoco and Apache are absurdly rich, so I've been looking instead at Canadian energy such as Gulf Canada, which has a 40 basis-point differential when benchmarked against U.S. equivalents such as Occidental Petroleum. As spreads begin to collapse some 10-15 basis points we'll sell those Canadian energy positions.
Looking down the road as we see stability in the economy and stronger second quarter earnings we will probably initiate rotating into cyclical sectors. In particular the chemical and paper industries interest me, names such as Weyerhauser. I also bought some enhanced equipment trust certificates, which have fat spreads and are secured. With poor fundamentals, labor costs up, gasoline prices rising and the economy slowing, I would look for credits such as the Federal Express EETC, which was attractive. It is a good name in a weak sector, and you get structural support. The only issue is that I don't see as much liquidity as thought I would in the EETC market, but it's still growing.
It is premature to start dipping into higher risk credits. We want to see something tangible first, signs that there is no recession, improvements in the second quarter. Federal Reserve Chairman Alan Greenspan's [easing policies] are a catalyst for jump-starting the economy. As the Fed eases it will give a nice boost to corporates, equity and the new issuance market.