Prescott B. Crocker manages Evergreen High-Yield Bond and is a senior vice president with Evergreen Keystone Funds, his employer since 1997. Prior to Keystone, he was director of fixed-income investments with Boston Security Counsellors. Previously, he spent 18 years with Colonial Management Associates, where he served as a vice president. He also spent five years as an investment banker at Advest Co. and two years in international banking at the Bank of New England. Crocker earned his Chartered Financial Analyst designation in 1982.
A veteran junk bond manager, Crocker’s forward-looking investment style has delivered consistent above-par returns. His reflections on a life lived in the junkyard are worth considering as well. In the last great crisis for junk bonds, Crocker played an unusual role on the Milken stage as the government’s primary witness for the state against the king of junk’s mountain. His numbers tell the tale of his abilities, but you have to go to Crocker to get his story right.
What attracted you to the money management business and the high-yield market, and kept you there all this time? You’re talking with the oldest living high-yield manager in America. Actually there probably is one older, longer-reigning fellow, but his son is really running Northeast Investors Trust for him. I got into money management in 1975. I had previously been an investor banker with Advest. Prior to that I was working as a banker with Bank of New England, which is the predecessor bank to Fleet.
A bank that succumbed to its own junk? Yes. It was 1975, tough times in the stock market, and I saw this mutual fund company called Colonial Group Inc., which I subsequently became an LBO investor in. It was a very timely decision. They were in a state of crisis because Con Edison, a major holding in their big bond fund, had crashed by missing its dividend. They discovered they never understood how to read balance sheets.
But that was ’75, way back before people read anything other than Moody’s and Standard & Poor’s. I showed up as an analyst with a long record of lending money to companies or putting together private placements to long-term lenders in the insurance area, for companies. So voil?, they had, as I used to say, someone to fire the next time they had a bankruptcy.
I started out at the bottom at a fairly ripe age. I think I was 35. They had at the time a big fund for them; a $300 million mutual fund. That was the Colonial Income Fund. A fellow and I, who was really I guess my boss, convinced the company that high yield should be a good place to go. So we converted an existing $42 million convertible fund into a high-yield fund in 1980. We raised it up to about $870 million when I left Colonial in 1997; by that time I had become the bond department at Colonial. I was a founder, and I started a lot of funds. One was the strategic income fund concept. And the other one was the government plus fund concept.
As in equities, so in bonds; managers make the difference-positively or negatively. Yes. I joined here February 1st of 1997; the Sentinel fund was created June 30, 1997. Evergreen was known as Keystone, and was acquired basically coincidentally with me coming on board. Anyway, they needed new breadth in high yield.
The Sentinel fund was basically a competition that they let out to myself and several others, including Eaton Vance. It was the only competition I’ve ever won where I didn’t apply to get into it; instead, they called me.
Tell us about your investment style. It’s an intensive team effort. I have a zest for investment, and these kids here are enlightened and excited that somebody can frequently prove to them that the game can be beaten. We’re interactive. I tell them their bonus ownership on a yearly basis of our potential is equal to three times the average investor’s position in our fund.
Whether they own them or not in their 401(k) program, they’re all aware that they really own the fund and it’s their money they’re dealing with.
Is this a valid investment and a valid market in which to invest? High yield has the potential to provide stock-like returns with lower-than-stock-like prices. My historical record beats the Russell 2000 with less than half the volatility because we’re making Russell 2000 investments at a senior level. So I think it is a valid market.
It should be invested in by an individual thinking that they are a bank, and they should take reserves for losses, and then they should reinvest gains.
Similarly, if the manager behaves like a bank, you realize that you’re loaning money, and you have the right to get it back, and you’re going to try like hell to get it back. If you just look at the returns for BBs, they have been substantially positive, and much better than the high-yield bond universe as a whole, because they are true loans.
Do you think such “ownership” is essential to good management? I take the approach of being a banker. I had a wonderful friend named Art Snider who said to me once, “You think you’re pretty bright with this loan proposition, but you can lose more money in one loan than you’ll ever make for an entire career at this bank.” That’s very good, because it’s true. You know, you have a portfolio of 15 loans, and what are you contributing? We’re in the business to loan money and to get it back. And we only get it back in the marketplace, in getting somebody to buy a loan.
So, first I ask why would you own it, and if we do, would you buy more, sell, or hold it, and why? Specific reasons. Everyone knows I encourage people to buy the stocks of our funds if they like them.
You emphasize character. What about characteristics? I look for “forward flashing indicators,” because you have to be in front of the marketplace in order to get the position effective. If the marketplace is doing the same thing you are, you won’t be able to pull it off.
The question I ask is not “What will the market look like in six months?” It’s “What will people think in six months?” and “What will the market look like in six months?” Name me forward indicators that are flashing change. They’re in front of other people, and they don’t necessarily get them. It’s a combination of small-cap, bond market, and venture capital investing. And it’s made up of some bright people, so the competition is worthy.
How do you account for such consistent performance versus competitors who are significantly better equipped technically? One reason perhaps is that I get to run a gold fund, and a strategic income fund that invests in international and in U.S. Treasuries. I have a very broad perspective to draw from. And I guess if there’s another one it’s that we’re not so small. But I still think that in order to win this game you’ve got to be so far in front of everybody else that there’s room to allow for strategy.
What are your forward indicators telling you about the market today? Well, we are, with the exception of AT&T Wireless, totally out of wireless, out of utilities, and out of wireline, except for one position in Level 3. We’re in it for earning its coupon dividend. We are very heavy in industries that can control or have an influence on pricing: chemicals, paper, forest products. We’re trying to be a cash flow investor as opposed to an equity surrogate investor, so virtually all our holdings are loans instead of investments. Gaming is our largest position at 11%. We invest in cyclical corporations, whenever they get cheap. But we are light on investments supported by asset valuation. Our contacts, research, what have you, got excited about IMAX. We bought IMAX bond in the low $70 range. That’s a company with positive cash flow we think is going to have a sharp and exciting future.
Where are do you think you’re going to go? I have been basically a high-grade high yield fund. My spread to worst as of September 3rd was 690 basis points, which is basically the spread to worst of the BB sector. And my prior, five out of seven buys had been things like Sprint, Cox, Comcast; they had all been high grades that had crashed in late July in terms of price. So that’s where I was; my average rating was B+. But if you just go by valuation it’s really a BB, it’s actually higher than a BB. So I have been very cautious. And I want like the dickens to take more risk, and I recently bought, in doing that, but I’m really reluctant to do it in the manner that would reflect a return to the halcyon days of high yield. I am really concerned with all this business with Iraq. I think that an invasion of Iraq would be the most inflationary thing since the Smoot-Hawley tariff act. I’m really playing it cautiously here. So where I’m headed right now is to harvest gains from risk assets and hunker down, and get more careful and more focused on hard commodities.