Moon is v.p. and portfolio manager at OppenheimerFunds. He joined OppenheimerFunds from Miller, Anderson & Sherrerd, a division of Morgan Stanley Investment Management, in April 2002, along with his colleagues Ben Gordand Angelo Manioudakis. He also spent six years at Citigroup. The Boston-based team is responsible for a total of $11 billion in taxable fixed-income assets, 25% of which are in corporate bonds.
Describe your investment philosophy.
First and foremost we're a total return shop--not at the total expense of yield but definitely between the two we will focus more on total return with less emphasis on yield. We're very benchmark-focused when taking any positions, particularly on the corporate side. We're always limiting ourselves with respect to how much position size we take versus a benchmark and most of our funds run against either a Citigroup Broad Investment-grade or Lehman Brothers Aggregate type of benchmark. If you look at our portfolios you'll see the position size is fairly small compared to a lot of other shops. We also limit our positions based on the amount of duration vis-a-vis the benchmark we're willing to take in an individual name.
We're also very big believers in liquidity. Of course you can get paid a little extra yield by getting less liquidity, but our belief has always been that in most instances you're not getting compensated enough for that illiquidity. We've all seen where when periods of crisis or stress come up the volatility on those bonds is fairly high and you just can't get out of them fast enough, if at all, and you ride them all the way down. So, the traditional positions we hold are in the large issuers.
Do you have any restrictions with regard to the ratings of issuers in which you invest?
Most of our portfolios have at least some allocation to high yield and I think we do believe that above and beyond the default risk you do get paid to move down the credit spectrum. Given that those credits aren't in our benchmark we do limit the amount per name and in aggregate how much we're willing to put into that bucket. We typically look more for the double-B part of the sector. We feel it's a somewhat neglected part of the universe, because there are a lot of investment-grade shops out there that either can't buy it or won't buy it and for the high yield universe it's typically a sector that isn't offering them enough yield.
What kind of returns do you expect from the corporate bond market in the second half?
We've come across a very strong first half of the year. It's going to be tough to beat that. We think the fundamentals are still improving for credit and we think the technicals will be there as well. We don't perceive much supply coming out over the next six months and there's a lot of demand for yield product out there. So, I think we have modest tightening from here, and a little extra carry. I think we can still get anywhere from 85-90 basis points of excess returns out of the benchmark indices.
Have you changed your strategy at all as you begin the second half?
With the tightening that's gone on the first six months of the year, your first reaction is to sell into it to some degree. But, the technicals and the fundamentals are going in the right direction. So, rather than taking too many chips off the table at this point we're continuing to hold onto some of the names that have come ratcheting in a lot and given the low volatility of those types of names we're still holding on just at least for the carry in some cases.
Can you give me some examples of names that you're talking about?
I think a good example might be some of the food and consumer product names. From a rating standpoint a lot of those companies are maybe high triple-B to low-A type credits, but the business fundamentals are fairly benign. There's not a lot of volatility, a little event risk, and on the surface, given the ratings, you'd probably say they're trading fairly rich, but given the low business volatility, again, we think those are decent names to hold on to.
The auto sector seems to have created the biggest split among portfolio managers, offering the most spread, but maybe also the most risk. Where do you come down?
The sector itself got extremely cheap last year and I think given the risk right now, even with the tightening, we feel we're being adequately compensated to hold on to some of the auto risk that we have in our portfolios. We have a moderate overweight in the sector. If the liquidity wasn't there, I'd have second thoughts about investing in it.
When the appetite for new deals becomes as intense as it has been lately, a number of investors have complained that they aren't getting the allocations they want. Is that a concern of yours?
I think the allocation you end up getting is a reflection of your reputation with the syndicate desk. If you're viewed as hot money that is not willing to stay in a deal, I think it will affect you. We're a total return shop, but that doesn't mean that we don't turn over the portfolio quickly, so we're trading in and out of positions, and I think in an environment like we're in now, where there is a lot of interest in all the deals, if you're viewed as hot money, unfortunately you're going to get allocated less. But, the syndicate desks know that we're not a flipper, so given the environment, we're satisfied with the allocation we've been getting.
Are there any dealer firms that you feel give you particularly good service?
I think a firm that's actually done a pretty good job in transforming themselves from what they used to be is Banc of America [Securities]. They've invested a lot on the research side--particularly on the credit side. They've got some people there who bring in some interesting insights that are useful for us on the buy-side. They've brought in a good team of traders and salespeople, and I think they've been putting capital to work in the sector as well.
Are there any people you can single out that B of A has brought on board recently who you think are particularly good?
I think more on the research side, they brought a whole team over from Credit Suisse First Boston. [The team is led by David Goldman, head of global markets research. Jeffrey Rosenberg is the firm's corporate bond strategist.] There are a lot of people out there who might put out research pieces that are more trading focused, and David and his team put out a daily piece that brings in things that you wouldn't have thought of yourself necessarily. So, we find that useful.
Can you think of any examples of useful insights they've provided you with?
It's not necessarily that I agree with it, but lately [B of A's research team] has been writing a lot about the impact of the dollar on fund flows or flows into U.S. Treasuries. It's something that was not the first thing on our minds as far as what was impacting overall yield levels.
Are there any other trends that you've noticed in the corporate bond market?
One of the bigger long term trends I see is the increasing amount of [quantitative analysts] in the field. Fixed-income has always been a quantitative field. Credit has always been sort of a last bastion of the more soft intangible things. Doing credit work, you're a lot more like the equity folks. Now, there's been a lot of focus on things like the impact of equity on fixed-income spreads, so I think a skill-set that's definitely going to be needed is being more quantitative focused on the credit side than used to be the case. But, I still think it's a struggle at this point. I don't think that some of the models are where some of the proponents say they are. I don't know how many people use it actually as a trading tool; but I do think it helps people focus in on distressed situations. So I think going forward for all of us on the credit side we need to be more quant-type focused and bring some more to our tool-kit there. The ratings agencies are picking up on it as well. Moody's [Investors Service's] purchase of KMV a couple of years ago definitely put a stamp of legitimacy on it.