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| Sid Bakst |
Bakst is managing director, senior portfolio manager and head of corporate credit instruments at Weiss, Peck & Greer in New York. Bakst manages $9 billion in taxable fixed-income, roughly $2.5 billion of which is in corporate bonds.
Where do you see opportunity in the corporate market?
Since the beginning of last month, basically since the autos have fallen out of the index, corporate bond spreads have had a major reversal. They've rallied a tremendous amount. Relative to what we've seen in the last two and a half years, we haven't seen volatility like the last two to three months since 2002. There's opportunity in corporates to play that volatility when you don't see names falling out of bed so to speak. We think there's a fair amount of volatility in the system to see that type of volatility in the near future and the opportunity in corporates is to keep a very close watch on volatility and pick those names you like that get caught up in it unnecessarily. With more leveraged buyout risk and equity-friendly events, you can seize opportunity in other names that are impacted. I expect to see additional volatility in coming weeks and months.
Are there any industry sectors you particularly like?
Our big overweight sector is in real estate investment trusts. That's been a sector that has historically been a little less volatile, which we like because it doesn't get caught up in it. In industrial and office retails, you can get some spread--spreads in that sector were hanging out pretty wide. One point we're watching with everything we own is the likelihood of equity-friendly events happening. And one LBO-proof sector is REITs. We're overweight it and we still like it and are playing mostly in the 10-year space.
The only other sector we like and are waiting to buy a couple of names in is pipelines and natural gas in the utility bucket. They have good cash flow and are pretty LBO-proof. And in terms of relative value, they lag the market in general. We're not as overweight there and have room to add. Really through all of April we were underweight on a corporate basis. We used the calendar through the month of May to bring our weighting to just shy of flat.
Do you see opportunity at the long end of the curve?
The long end has been beaten up with the flattening of the curve. Thirty-year paper has underperformed in every name. Selectively there are names we're not under at the long end of the curve and there are selective opportunities in triple-Bs at the long end of the curve that have been beaten up. One name is Nexen Inc., it's a Canadian energy company. It's a credit that came with a 30-year back in March, it came at 127 basis points over and then three weeks ago it traded at 190bps over. That's phenomenal spread volatility. There are no fundamental issues with it and it was a relatively large deal. Basically, it fell out of bed for no particular reason. It widened to 190bps and came into the 150s. You have to be willing to stomach and ride out the volatility in credits you're comfortable with.
So the recent volatility does not reflect credit fundamentals in your view?
It's been a period clearly driven by the autos and uncertainty around what was happening with the index, which had a real unsettling effect on the entire market. Clearly the [market was being] irrational and the assets were being sold indiscriminately.
Do you expect this volatility to continue?
I don't think we'll see a 60-70bps swing but we could see 20-30bps swing in names like that. Clearly we could be out 10 or 15bps or be in 10 or 15bps easily. That's a pretty big range on a corporate basis and we'll see it in high-beta names and at the long end.
The thing of it is, ex-autos right now the Lehman Brothers credit index is only 10bps wider year-to-date. To the extent that volatility was introduced, with [the autos] behind us the market has certainly calmed down which is why the market did so much better. Supply had been light, but now we've had on a stretch of supply, supply that's been coming and has caused some indigestion [last week].
Do you expect the return of supply will ultimately restore liquidity?
That's absolutely correct in what you hope happens. Generally speaking, with the first bunch of deals everything goes well and they may or may not be generous. Generally speaking, money jumps on the first deals. The market gets saturated and then they give concessions. Then you hope for increased liquidity and increased trading. Clearly we've all of a sudden seen the new issues pull in. What will happen is during the course of that indigestion that takes place, deals will be spit back out for a while when one, two, three deals widen on the break. Clearly it gets to a point where the market takes a breather. Liquidity has clearly gotten better in the last [month] with the new issue supply, and [last week] there was a pause. How much further widening is not quite clear. We're in that period of indigestion right now and we'll see how far out that takes us.
You mentioned you are concerned about event-driven widening?
Near-term volatility is more supply related but clearly LBO activity and equity-friendly events are where the more contagion element comes into play. For example, the Clear Channel cfo gets hired by a venture capital fund and the whole media space gets beat up. It's similar to the period in '01 and '02 as critical to outperforming is error avoidance. That hadn't been the case in '03 and '04 when you needed to be overweight corporates. Diversification and keeping positions small is clearly key. There are a lot of lists floating around the Street with likely LBO candidates and high risk names and clearly a big part of what will enable out-performance is making sure you don't get caught up in those events.
How are you positioning yourself for the summer?
In the near-term we're playing the calendar where concessions are being made and will try to hover around the flat line. In the summer, seasonals aren't great though June and July have bucked that trend the last two years. I'm thinking the next seven or eight weeks what to do is be around the flat line, toward taking it potentially higher. Heading into the latter half of August in vacation time I'm hesitant to be overweight in that period. Clearly there are risks in the market; I'm not anticipating a period where I think the coast is clear. In the near-term I'm flattish but then maybe take it down through the end of the summer.