The shareholder-friendly wave sweeping the market is cramping the style of bond investors, prompting some to eschew the corporate sector. Portfolio managers are selling out of corporates or taking very short positions, and most agree the situation is not going to change any time soon. "It's not like this is going away," said John Pak, co-founder of Midanek/Pak Advisors. "[Shareholder-friendly activity] is a part of the structural reality of the market."
Marty Schafer, portfolio manager of more than $1 billion at Principal Global Investors, said he has been selling a lot of his investment-grade credits, dropping his allocation to the sector 5% to 35% over the past three months. "There is a ton of risk that is out there," he said. "You've got so many things to worry about right now with credits, the rising rate of the Federal Reserve, merger and acquisition activity and of course, stock buybacks and shareholder-friendly activity."
Schafer said he has been placing any new money in very short-term floaters. He has been trying to find deals that don't seem susceptible to stockholder friendly activities. He has recently bought into deals for ConAgra Foods, Phoenix Companies. "I've dabbled in SBC Communications' new issue stuff," he said.
One investment-grade manager said he has been shorting corporates lately and looking to areas that hold less risk, such as the taxable municipal market. He said there is opportunity for those with more appetite for risk. "Depending on how much risk you want to take on you could do very well....or you could get creamed," he cautioned.
Walnut Creek, Calif.-based Midanek/Pak has minimal exposure to corporates, but has been closely monitoring the trend of shareholder-friendly activity, said Jim Midanek, co-founder and portfolio manager. "What we are seeing here is the effect of low rates, understated stock prices and the shareholders are demanding some movement," he said. "The market can't get out of its own way."
