Choy is an investment-grade and high-yield portfolio manager at FFTW. He helps manage $40 billion in mostly pension related assets from New York.
What type of funds do you run?
We manage against a broad array of benchmarks including the Lehman Brothers Aggregate and Global Aggregate, and government benchmarks from Merrill Lynch, J.P. Morgan, Citigroup and customized credit only benchmarks. In times when we are bullish we'll have some corporates and in times that we aren't bullish, we'll have none. The classic Lehman Aggregate would have 20% and when we're neutral we are close to that. We look at dollar duration more than percentage, because it's a better gauge of the sensitivity to spread and yield changes.
What is your investment strategy?
While fundamentals look strong (first-quarter operating earnings grew 26%) and valuations seem fair, we anticipate a challenging second half. We've pared our overweight in U.S. corporates in April and are now neutral versus our benchmarks. We anticipate higher rates as the recovery continues and as excess capacity is absorbed.
What risks do you see for investment-grade investors in the coming month?
A few that occur annually and a couple that are unique to this particular point in time. Rising rates are impacting a wide range of markets from equities to mortgages to emerging markets. Volatility is likely to rise as the U.S. election approaches and while terrorism lurks in the background. Spreads also tend to weaken in the summer months. Spreads can tighten modestly from here but can widen dramatically if one or more of these risks are realized.
What kind of themes are you seeing in the investment-grade market and how are you responding to them?
New issuance is down about a third year to date and corporations continue to de-lever, albeit at a slow rate. In our security selection process, we're focused on names with strong market positions, robust cash flows and limited sensitivity to rising rates. One recent deal which met this criterion was an offering from Pearson Plc, a leading media company.
What sectors do you like/dislike?
We continue to like the cable television business due to its pricing power and growth from new services such as video on demand and broadband. But there are assets on the market and credit profiles will depend on financial discipline. In a related space, we favor European telecom providers such as Telecom Italia and France Telecom over their U.S. counterparts. The credit trends for the former are improving while the latter are deteriorating.
Basic industry valuations such as those in the paper sector look fully priced in. We are also avoiding super high quality holdings such as Wal-Mart Stores, supranationals or pharmaceuticals due to valuations and susceptibility to swap widening.