Aran joined Alliance in early 1991 to establish a credit research group. He built it into a 34-analyst team before becoming a portfolio manager overseeing credit in the Global Bond Group, which manages roughly $13 billion of the firm's $180 billion in taxable fixed-income assets. Aran has also served stints on the sell-side, at Standard & Poor's and in commercial banking.
How has being on the buy-side changed in the last 13 years?
The liquidity of the market has changed significantly from what it was in the early to mid '90s to what it is now. The liquidity was excellent before the collapse of Long Term Capital [Management ] in the Fall of 1998. In my view it's less now than at its peak in the mid '90s, but better than in '98.
The buy-side has gotten bigger and, as a result of consolidation, the sell-side has gotten smaller, has a lower risk tolerance and less willingness to hold large inventories. The last year has been a nice technical cycle for credit, but if it becomes a shed-risk environment rather than one of adding risk, volatility would likely escalate dramatically.
The other major trend is that we're seeing an emergence of international interest in corporate credit as there are fewer currency alternatives. Twenty years ago the international fixed-income investor bought government bonds and speculated on currencies. But, interest-rate volatility has shown that speculating on rates and foreign exchange are difficult at best. Credit offers higher yield and at least historically has outperformed higher-quality alternatives. That's why we're now seeing all this interest in credit.
Describe your investment philosophy.
Our core philosophy is a very simple one: research matters. Because it matters so much in our business we spend a lot of money to attract and retain the resources necessary to, in a sense, outguess the market, including the ratings agencies. Many of our analysts have either ratings agency experience or industry experience.
One example of something we've done recently that shows the importance of our research involves Ford [Motor Co.] which is the largest corporate issuer. We shared the conviction that success or failure in the new F150 model was going to make or break their ability to meet estimates in the fourth quarter this year and the first quarter next year. In late July we hired a third party firm to look at the five largest markets for pickup trucks--maybe the 22 biggest Ford dealers in America for pickups--to try to gauge the level of interest from clients. The information came back that of the initial allocations to those key dealers, 10-25% were pre-sold without any concessions and, to put it in context, a hot model usually sells 10% of its allocation before it hits the dealer, so that gave us a strong indication that at least it's going to get off to a fast start. It increased our conviction to raise our Ford exposure on the heels of that and so far--it's still early--but September was a record month of sales. That supplemented our basic focus on this key sector and we've remained overweight.
Are you overweight credit?
We are, though less so than six months ago. We were 20% overweight in the global accounts in the spring, and we're more like 12% currently.
So you feel a recovery is underway?
Our economic group has been very accurate in correctly forecasting a liquidity-driven expansion in the U.S. economy. If anything, they were a bit early relative to its impact on interest rates, but we are of the firm belief that this recovery, once it gets legs, and we believe it is very close to getting those legs, will lead to higher rates.
If you see a recovery ahead, why reduce your allocation to credit?
Well, it's still overweight and the reduction is because of valuations. The market has run quite a bit. We actually think it has a bit more upside here, but certainly less than it did 120 basis points ago, which is what the credit indices have narrowed versus Treasuries in the past year. So, if the Lehman Brothers index was roughly 100 basis points over Treasuries, we think it could get to 85 or so, but is there more risk to that expectation? Absolutely.
Is the sell-side research model changing on the fixed-income side?
I think its more shop-by-shop driven. Years ago, Merrill Lynch was a very big underwriter of credit. Now they're not. They've lost a significant amount of market share post '98. Why is that? I guess you'd have to ask them why they're reorienting themselves. At the same time, firms like UBS Securities and Deutsche Bank have invested heavily in the U.S. markets and tried to expand both their underwriting and secondary trading activity. I guess Morgan Stanley and Citigroup have been steadier participants with little visible change in the way they operate so it's hard to roll it into one market answer other than to say maybe the focus has changed at certain firms and maybe the playing field has shifted a bit. What's more important to us is that we've focused our own attention on what we have to say versus what everyone else has to say. It's helpful to crosscheck, because when you go against everyone else is when you stand to make or lose the most money, but the process really is driven by our own internal views.
Regulators have certainly been active in the last year or so, though much of the focus has been on the equity side. Are there regulatory issues that have come up lately that you think impact your job on a day-to-day basis?
Not directly that I can see. Clearly the investigations are of interest professionally and personally. As you know, Alliance suspended a couple of people on the mutual fund side--a portfolio manager of a tech fund and the head of marketing for hedge funds here, so we are interested in what happens and how it affects the market participants, ourselves included. But, there have been no changes in operating procedures that I'm aware of.
Is there anyone on the sell-side who has hustled a bit more than the rest, or an analyst you feel has particularly good insights?
Lehman Brothers has been very consistent over time in their analysis because of their effort in the indices which they, in my opinion, dominate. They also have weekly conference calls on Tuesday mornings at 7:45 to dissect various parts of the corporate bond market, melded with quantitative scores and analyst opinions and liquidity outlooks. It's a soup-to-nuts forecast that's more useful sometimes than others, but always intriguing. Jack Malvey [the firm's head bond strategist] and Rick Rieder [head of the firm's global credit business] are the key guys there. Dennis Adler [strategist] at Citigroup is also a very respected veteran with good insights on a regular basis. Away from that, CreditSights does a good job.