Koller manages $2.5 billion, nearly all of it in fixed income, from Winterthur's office in New York. The firm is an affiliate of Winterthur Group, a Swiss insurer. The majority of the bond portfolio is allocated to investment-grade corporates.
Do you foresee any changes in your allocations over the next six months?
No. I still think that corporate spreads will have a little further to tighten. I believe the economy is performing well and will continue to, particularly over the next six to 12 months. There's no need to lighten up on corporates.
What sectors do you like or dislike?
I don't like the telecom sector, because of the fundamental changes it is continuing to go through with the uncertain outcome of who will be the winner. For example, the companies are all implementing their own strategies in light of regulatory changes, such as number portability, and the increased telephony over the Internet that AT&T Corp, MCI Group and Sprint Corp. just announced they will put money into. You don't know who the winner will be in this game. Lastly, with MCI coming out of bankruptcy and having a clean balance sheet, it has a competitive advantage over the old telecom providers that did not go bankrupt. How they will use their competitive pricing advantage is just too big of an uncertainty. That's the big area I don't like at all.
I like the cyclical areas where you get benefits from a growing economy, such as industrial names, cars, car manufacturers and related industries with consumer cyclical exposure. We don't like the more defensive names, they are too expensive. For example if you look at Johnson & Johnson, it is trading way too tight to think there is any value left.
Speaking of the auto industry, what do you think of the recent troubles with Ford? Can the company turn itself around?
We believe Ford will be able to turn itself around on a fundamental basis. The question is whether they will be able to produce the models that the consumers want. It's as simple as that. From a design, price, and performance point of view, is it the car that people want to buy? We happen to believe they will succeed in that.
Are there other sectors where you see a shift in momentum?
No, not really. I think it's a continuation of the last 12 months. The trends and themes will continue into the next six months. You always have changes at the margins but if you look at the big trends, it'll be more or less the same.
How do you outperform when double-A/triple-B spreads are so tight?
Well, it's not that it's the tightest range that it has been in general. We'll see tighter spreads still. We believe there is still some room left for it to tighten over the next six months and then there comes a time when you have to lighten up and go into Treasuries and that may very well be in the second part of next year.
Do you expect a lot of issuance in the coming year?
Less than we had this year. Rates will be higher than they were this year. A lot of funding has been done this year that would have otherwise come next year. Rates will go up rather than down from here.
What major changes do you expect in the coming year?
The change will be that yields on Treasuries rates will be higher at the end of next year than they are now. We'll have to deal with a more or less severe bear market in yield, which is an environment we haven't had to deal with over the last few years. This will be the significant change in the bond market for next year.