, Editorial Director
Because of the extraordinary returns in the stock market in the past 10 years -- more than 19% compounded annually -- institutional investor interest in bonds has waned.
In fact, the average commitment to domestic bonds by defined benefit funds among the 1,000 largest pension funds was only 30.5% as of Sept. 30, 1998. For defined contribution plans, it was only 8.8% (excluding stable value funds).
Except for Bill Gross, fixed-income managers are like Rodney Dangerfield: They don't get any respect. They hardly ever are profiled in financial publications, including this one. Fixed-income investing just isn't sexy.
But soon fixed-income managers such as veteran Fred Tattersall, managing director of Tattersall Advisory Group in Richmond, Va. -- which manages $6 billion in tax-exempt assets -- will get more attention.
Mr. Tattersall, who has been managing fixed-income portfolios since 1974, sees opportunities for good returns in the fixed-income markets. He believes A-rated 10-year securities offer particularly attractive opportunities now because the spread between them and Treasuries is "as wide as it has even been."
While 10-year Treasuries are offering a yield of 5.8%, A-rated 10-year corporates from companies such as Coca-Cola Enterprises Inc. and Ford Motor Co. are offering 7.35%. The question is, given the strong economy, why the wide spread? Mr. Tattersall sees four contributing factors.
On the supply side, Chief financial officers want to sell 10-year paper before the end of the year to avoid any possible complications to their financing plans from unexpected Y2K bugs. Also, a high level of merger and acquisition activity also has increased supply.
On the demand side, as foreign economies have improved, foreign investors have stopped buying U.S. assets, reducing demand. Also, dealers who normally support this market don't want big inventories going into the end of the year -- which means there is little liquidity in the market, Mr. Tattersall said.
The result is that supply is up and demand is down. This means those seeking to sell A-rated 10-year securities have had to price them so the yield is in the 7.3% to 7.5% range.
"This is an opportunity. I think it is an aberration that goes away, not a new trend. When it does go away you get paid for taking advantage of it,"Mr. Tattersall said.
He also finds opportunities in mortgage-backed securities. "If I have a liquidity need, then I buy mortgage-backed securities because they're more liquid," he said. "Ten-year maturity Ginnie Maes at 7.5% yield is a pretty good deal."
Mr. Tattersall sometimes gets the securities he wants by buying shares of closed-end funds. They're a particular bargain because they sell at a 15% discount to net asset value and they hold the same assets he holds. The only reason for the discount that Mr. Tattersall can see is that they're sold by brokers and then forgotten.
He said there is no duration play available in the fixed-income market now, and the key to success is looking at market sectors. "Those who get overweighted in sectors relative to their benchmarks will win the game. That's the story for the next nine months."
He believes the 10-year A-rated sector could produce a 10% return in the next 12 months as spreads tighten and rates overall drop perhaps 50 basis points.
Bonds might not be sexy, but a 10% total return for the next 12 months with relatively little risk sounds at least attractive.
