Catrock Capital Management is maintaining a defensive position in a high-yield market that appears fully valued as 2005 kicks off, and is putting cash to work in short-term investments. "The market is headed for a correction," predicted Richard Coons, portfolio manager of the $100 million fund based in Greenwich, Conn. He expects a spike in interest rates in the next year and a half will adjust spreads in what he believes is an overvalued market.
Coons declined to be more specific as to when he thinks that correction will occur, but did say the market peaked last summer and value has been hard to find ever since. "The market reached its zenith in June or July of 2004; it's a very tough market to get positive returns in," he added.
Looking ahead, Catrock is putting new cash to work in short-term holdings. "On a fundamental basis, [high yield] is fully valued, so you either need to play it flat, structurally hedged, or short the market--which is very expensive," he added. He declined to highlight any short-term trades he finds attractive. Catrock's duration is between two and a half and three years due to its rising-rate concerns.
Catrock is currently avoiding the finance sector as Coons feels it is overvalued because its earnings are based on low rates. "They lent long at low rates and their short-term funding is based on low rates, so if their short-term funding should fail, they'll be left with a gap problem," he explained, referring to companies in the sector.
While Coons said he doesn't find any sector especially attractive, he did note telecom has been looking more appealing of late. "The last couple of years, the sector had been poorly valued but we've seen a terrific rebound in values in recent months," he stated. Coons highlighted Global Crossing as a credit whose value has recently appreciated.
Catrock uses the Merrill Lynch Cash-Only High-Yield Index; Coons declined to quantify the fund's allocations relative to its benchmark.
