Quick Take: In a year marked by feeble equity markets, corporate crises, and microscopic interest rates, bond funds have flourished. The Calvert Social Investment Fund: Bond Portfolio (CSIBX), managed by Gregory Habeeb, has benefited from the climate favoring fixed-income securities. Unlike the vast majority of bond funds, however, Habeeb must adhere to the rules of `socially responsible’ investing that Calvert imposes on its family of socially responsible funds.
For the 12-month period ended September 30, the $166-million portfolio gained 5.2%, while the average intermediate-term medium quality bond fund rose 4.9%. For the three-year period ended September 30, the fund delivered an average annualized return of 8.1%, while the peer group gained 5.1%.
Habeeb has been the fund’s lead manager since February 1997. However, Reno Martini, chief investment officer at Calvert, and Matt Nottingham, the fund’s co-manager, participated in the interview. In July 2002, Standard & Poor’s reclassified the fund’s peer group category to intermediate -term medium quality from long-term medium quality.
The Full Interview:
Quick Take: Robert Rummelhart, manager of EquiTrust Series: Strategic Yield/A (FBYBX), tries to avoid some of the pitfalls of high-yield investments. While so-called junk bonds can provide sizable returns and diversification from other asset classes, many investors have steered clear of high-yield issues because of their volatility.
In response, Rummelhart has built a portfolio of high-yield bonds from basic industries along with selected investment-grade bonds. The upshot is that he sticks with higher quality junk bonds and lower quality investment-grade bonds.
Rummelhart, who has run the fund since 1987, appears to offer a lower octane alternative to pure high-yield plays, since the fund’s risk profile is much lower than the average high-yield fund, and its long-term returns are higher than most.
The fund’s standard deviation is 3.45%, versus 9.13% for the average high-yield fund. For the ten-year period through October, EquiTrust Strategic Yield rose an annualized 6.7%, compared with 4.4% for its peers. Recent results are also attractive. The fund has gained 4.6% so far this year through October, while its peers fell 6.3%.
The Full Interview:
S&P: The fund focuses on high-yield bonds, but it also has a sizable position in investment-grade bonds. How would you then describe the fund?
RUMMELHART: Historically, it has been different from a pure high-yield fund. While high-yield bonds are our primary mandate, we also hold investment-grade issues. Instead of limiting ourselves to bonds rated double-B+ and lower, we’ll also consider triple-B issues.
This strategy reduces the fund’s volatility, so our standard deviation is less than half that of the average high-yield fund. When the high-yield market is overvalued, it almost forces you to buy things you don’t want to buy. We have always been more of a high double-B or a low triple-B fund.
S&P: Why do you take this dual approach?
RUMMELHART: These areas of the market have historically been inefficient. Because of their mandates, many investors avoid these areas, so you get mispricing. A lot of high-yield funds won’t buy double-B bonds because they don’t have the yields they want. Investment-grade buyers avoid the lower triple-B issues because they’d have to sell them if they dropped to junk status.
S&P: Does your strategy have any drawbacks?
RUMMELHART: The downside is we’ll underperform if the high-yield market does very well. That’s a by-product of our lower volatility. For example, 1999 and 2000 were difficult years for the fund when the high-yield market was in a go-go period. A year or two later, however, many of those high-flying bonds were worthless.