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| Michael Materasso |
Materasso is an executive v.p. and head of global fixed income at Fiduciary. He manages the firm's $18 billion fixed-income fund from its headquarters in New York. What is your broad investment philosophy?
The company focuses on top-down macro factors, as well as bottom-up factors at the company level. As an overall investment philosophy, we begin with a global perspective and try to assess the impact of the global economy on the U.S. economy in general and U.S. fixed-income markets in particular. One example of the global economy influencing the U.S. fixed-income markets and the U.S. economy is the heavy dollar purchases by the Asian central banks and their investing that in the short end of the Treasury market. This is an important factor influencing the U.S. Treasury market. This may have an effect on the interest rates in the U.S.
What is your overall economic forecast?
[Federal Reserve Chairman Alan] Greenspan has laid out a forecast for the economy that looks positive. He talks about positive economic growth of about 4-5%. Such a high economic growth in the past would have scared fixed-income investors. This would have been considered sharp growth in the past economic cycles. But now, with low job growth and low inflation, this is just slightly above the normal economic growth. This is putting the Fed on hold unlike in the past growth cycles. We feel the Fed is not likely to raise interest rates before December or early next year. This is because the Fed's job is to keep inflation low and stimulate employment growth. It is going to take a while for the Fed to generate enough jobs and so we don't expect any rise in interest rates until early next year.
What is your current strategy?
With 10-year Treasuries at 4%, we are slightly short duration at 5% below the Lehman Brothers Aggregate [Bond Index]. Our short duration is because we are on the low end of the trading curve. We are underweight 30-year maturity bonds by 5%, overweight in corporate bonds by 10% and underweight mortgages by 5%. We are underweight in the mortgage-backed securities because we feel that they may under perform Treasuries should the interest rate of the 10-year Treasury fall below 4%.
Outside the U.S., we have 10% in high-yield corporate bonds and 12% in non-dollar bonds, specifically in the U.K. and Germany. Our feeling is that Europe is behind the U.S. in economic growth and is considering lower rates. The strengthening euro against the dollar would slow economic growth further. So, we feel it is a good time to invest there. We have shifted our assets from the U.S. to foreign countries, which is $10 billion of the $18 billion of the fixed-income fund. We correctly anticipated the decline of the dollar. With economic expansion and improved credit quality, we expect spreads tightening in the corporate sector. We will continue to be defensive on duration.
How do you assess the decline of supply in the corporate market?
That is part of the premise why we liked investment-grade corporates. A shortage makes it more attractive. This supply imbalance between Treasuries, because of the deficit that has to be funded, versus the corporate sector where corporations were creating free cash flow to retire debt, makes corporates more attractive for investment. We see a further tightening of investment-grade corporates and are focusing on triple-B bonds, especially in the media and telecom sectors.
What do you make of the recent spate of mergers? How do you see this affecting bondholders?
The mergers and acquisitions in the mid 1990s were all stock deals resulting in companies with greater market share and financial flexibility. Initially, these are positive developments and will be okay. But, we will have to be careful and keep a watch on these to see that they don't turn into highly leveraged transactions where debt is being used instead of cash. Another factor that is important is looking at the high-yield sector to see what kinds of companies are able to issue high-yield debt. When companies are coming to the market that are of questionable credit quality and are able to issue debt, then it is an early warning signal that credit quality will decline. It does not happen immediately but the deals done in high-yield back in late 1997-98 had to reconcile bankruptcy in 2001-02. Right now, we are ok. We are early in the cycle. The companies are generating free cash flow to pay down debt or for acquisitions.
What's your view on Greenspan's criticism of Fannie Mae and Freddie Mac being highly leveraged?
They are highly leveraged and the benefits they provide to the consumer are minimal. They are highly leveraged, especially when compared to banks. If they are deleveraged, as bondholders we have less-risky investments. But, the more near-term concern would be what happens to investors--institutional, banks and foreign banks--that are treating these agencies as government enterprises and do not maintain any limit on these investments as they would do on corporate bonds. If the Congress initiates steps to deleverage these agencies, this could cause credit quality concerns among investors. This could result in heavy selling pressure and lack of buying. This could affect Fannie Mae and Freddie Mac and also create turmoil in the capital markets.