Thunelius is director of the long-term fixed income group and senior portfolio manager for the taxable-fixed income group. His group of 12 portfolio managers oversees $5 billion in taxable-fixed income that runs the gamut from low-duration Treasury funds to generic mortgage-backed security funds. He received a Bachelors degree from Dowling College in Long Island, N.Y., with a major in finance. Here, Thunelius, who has been at Dreyfus for 12 years, talks mostly about the $430 million Premier Core Bond Fund.
Q:What has been your strategy going into the New Year?
At the beginning of December we started allocating more to our high yield corporates, bringing the exposure from about 11% to just under 20%, by selling Treasury paper. Currently, only about 6% of our portfolio is in Treasuries. There is no doubt that the Federal Reserve will ease and that the yield curve will steepen, so we're holding onto short paper and selling the longer issues. There is a chance that long-term rates will go higher and short-term rates get chopped, with the two-year Treasury bill getting into the 4.25-4.50% range.
Q:What is your view of the economy going forward?
The worst of everything has already been priced into the market. We thought the Fed was going to ease when it met at the end of December, and it probably should have. We are already in a recession, and we'll be coming out of it by the second quarter of this year. I remember being on the trading desk in 1991 and people were debating whether we were in a recession. Most people said no, but then in July we realized we were in a recession but nobody knew it.
Q:Are there particular sectors or names you're focusing on in the junk market?
This is a name specific strategy and we're asking ourselves if these credits are priced fairly. We like Lear Corporation, which was a high yield credit in 1990, is high yield today and will be high yield tomorrow. We also like Allied Waste and Georgia Pacific, which was hurt by the whole asbestos exposure and is priced too wide. Bank of America is another one; two weeks ago its 10-year paper had a spread of 185, and now its new issue came at a spread of 235. For a single-A rated bank that's attractive, especially because it is the financial sector that always leads you out of a recession.
Q:Are there any sectors or names you are particularly wary of?
There are no bad bonds, just bad prices. We have avoided telecom paper for a long time, because if you look at it from a simplistic spread sheet perspective, they paid all this money for licenses, but they couldn't even tell investors when their cash flow would be in the positive, or when they'd be earning any profits.
Q:What is your attitude toward prepayments?
Clearly prepayments is going to be a problem, so about four months ago we started selling collateral mortgage investments and buying less sensitive structures, such as commercial mortgage backed securities and Ginnie Mae project loans. Forty percent of our portfolio is allocated to mortgages, but only about 11% is in generic collateral. We'll continue carrying out this strategy selectively.
Q:What is your duration play?
We use the Lehman Brothers Aggregate index, and our duration is almost always on top of the index. Maybe two times a year we'll differ from it, but then by only plus or minus 10%. I'd rather have a neutral duration, because where I generate extra return is in specific sectors. Our job here isn't to guess on interest rates.
Q:We have been talking mostly about youre Premier Core Bond Fund. How do these strategies apply to your fixed income group at large?
We are 100% team managed. If we decide to sell a holding in one fund, we'll do it to all the funds that own that paper. I run the team, but any decisions I discuss with members of my group first, such as [portfolio managers] Michael Hoeh and William Howarth, and that is what makes us different.