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Merrill Lynch Eyes Crossovers

Merrill Lynch Investment Management sees a lot of opportunity in the crossover part of the corporate bond universe, said John Burger, portfolio manager of the $8.2 billion primarily investment-grade fund in Plainsboro, N.J.

Merrill Lynch Investment Management sees a lot of opportunity in the crossover part of the corporate bond universe, said John Burger, portfolio manager of the $8.2 billion primarily investment-grade fund in Plainsboro, N.J. The fund is looking to buy names it thinks are most likely to benefit from a future upgrade. "The rating agencies often lag in terms of reflecting a company's credit improvement. We expect to see some upgrades coming and to see price appreciation," he stated.

About 10% of Burger's portfolio lies in crossovers, an area which is not a part of his index, the Lehman Brothers Credit Index. He will maintain the 10% allocation.

Burger said iStar Financial, currently rated Ba1, and American Greetings, rated Ba2, are candidates for an upgrade out of the junk bond universe. He also said Manor Care, which was recently upgraded to Baa3 from Ba1 by Moody's Investors Service, is an attractive credit. Burger said crossovers are attractive because he expects they will benefit the most if some of the uncertainty in the market due to fears of terrorism, high oil prices and the election diminishes. "Once the election comes and goes, investors will say 'how come we're not longer spread product?'"

MLIM is also overweight autos because the sector's valuation relative to the general corporate market is attractive. "Although auto fundamentals are perhaps declining modestly, autos are priced too cheap," Burger said, declining to quantify his allocation to the sector or to name individual credits.

The fund is also overweight media because Burger thinks the sector widened out substantially based on event risk, such as the recent Cox Enterprises bid for Cox Communications' outstanding shares, and will rebound. MLIM is underweight consumer products, which Burger thinks are priced too tightly. "It's considered a defensive sector, but it's not as defensive as it's priced," he said. Burger will reinvest new cash into his existing investments, maintaining his current allocations. He declined comment on the fund's duration.

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