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.
S&P: What is your current allocation between high-yield and investment-grade bonds?
RUMMELHART: If you include crossover bonds (high-yield issues that have recently fallen below investment grade), we’re are about 50% to 60% in high-yield issues. The balance is lower quality investment-grade bonds and cash (about 3%). Historically, between 40% to 60% of the fund is always in high-yield issues and crossovers.
S&P: What industries do you favor?
RUMMELHART: We’ve always focused on basic industries because they generally have hard assets and stable cash flows. Our main sectors are about 19% in utilities, 11% in metals and mining, 17% in REITs, and 9% in chemicals.
S&P: So you avoid more speculative industries?
RUMMELHART: In the 1990s, we stayed away from telecom and technology issues because we felt that many companies were tapping the high-yield market when they should have looked to venture capitalists for financing. Venture capitalists, however, were charging 25% to 30% premiums, while the high-yield market offered capital at 10% to 15% premiums. I didn’t see enough of a risk/reward trade-off in those situations.
S&P: What is the fund’s average duration?
RUMMELHART: As of September 30, it was 4.2 years. Historically, it has ranged from four to five years.
S&P: What is the fund’s yield?
RUMMELHART: After expenses, the current yield is about 6.25%.
S&P: Have you made any major changes to the fund in the past year?
RUMMELHART: Not very many. We moved into some crossover names, such as enhanced equipment trusts of airlines, trading at yields of 10% or better, yet they were well collateralized.
S&P: What areas are you currently looking at?
RUMMELHART: We are now focusing on pure high-yield issues because yield spreads are still historically high and generally reflect any bad news, so they should probably perform well going forward. Barring another shock to the economy, or a major decline of the equity markets, I think high-yield issues will outperform treasuries.
S&P: Why does the fund have a good long-term track record?
RUMMELHART: Because of our low volatility. Instead of swinging for the fences, we try for good solid choices. Our goal is to generate returns close to the high-yield market, but with a lot lower volatility. If you want to be fully exposed to the high-yield bonds and think they will rally tomorrow, our fund wouldn’t be good for you. But if you are a long-term investor and want high-yield exposure with lower volatility, then we would be good for you.