Morningstar Advisor - Summer 2007 - (Page 8)

10 Questions Bonds Away: High-Yield Debate Brightens Conference Who is your biggest investing influence? What was your first investment? They were last but not least. The closing general session at this summer’s Morningstar Investment Conference featured “Bond All-Stars” Keith Anderson, Bob Rodriguez, and Steve Walsh. They agreed on some things— all three managers said that they’re steering clear of the subprime sector, for example—but the topic of high yield was a different matter. “Risky assets have been wonderful,” Anderson said in response to a question from moderator Scott Berry, Morningstar’s associate director of fund analysis. “But now you have cracks in the foundation of what allowed them to do well. You didn’t have any defaults occur in the past month that caused spreads to widen. You simply had investors question the availability of capital at that price, and now you’re seeing deals that can’t get done, deals getting pushed back, people getting nervous.” Rodriguez agreed—vehemently. “It’s a fool’s paradise,” he said. “Wouldn’t touch it with a 500- or 1,000-foot pole.” FPA New Income’s exposure to high yield is at an “all-time record low” of 1% of assets, down from 25% in the fourth quarter of 2002, he said, adding that he sees a time not so far away when high-yield spreads will be setting record highs at 1,100 basis points over Treasuries. “We’re going to see a lot more ‘Chryslerized’ situations,” Rodriguez said, in which Daimler “shrewdly” bought the company for $36 billion in 1998 to sell 80.1% of it to a private equity firm for $7.4 billion in 2007. “They destroyed a lot of capital, but who gives a damn. It’s other people’s money,” Rodriguez said. “I just don’t think I’ll be in this area for a long time.” Walsh wasn’t fully buying it. He said he’s still finding value in high-yield areas, including the auto industry, which drew a chuckle out of Rodriguez. “That’s what makes markets,” Walsh said in response. “But I feel fairly confident that Bob could have given that same discussion that he just gave in early 2006.” “Exactly,” Rodriguez said. “I’ve always been accused of being early, but I’d rather be early than be terminally late.” “That’s a good idea,” Walsh said, laughing. “I just wouldn’t rule out high yield entirely, but certainly you want to be down from where you’ve been.” “We’ll be down to zero in about four months,” Rodriguez said. We knew these managers would be interesting and wouldn’t hold anything back, so we invited them to participate in 10 Questions before their panel. K What’s your favorite thing about managing money? What led you to manage bond funds rather than stock funds? What has been the biggest surprise in the bond market so far this year? What will drive the Fed to move rates and when will it make its next move? What is the biggest challenge facing bond fund managers? If you weren’t a fund manager, what would you be? What are you reading? What place haven’t you been to but would like to visit? 8 Morningstar Advisor Summer 2007

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Morningstar Advisor - Summer 2007 Contents Letter from the Publisher Get to Know the Bond “All-Stars” Research Briefs Our Stewardship Test Gets Tougher Save It for Later Too Many Oranges Best of Both Worlds No Two Clients Are Alike When It Comes to VAs, It’s Seller Beware Hands On: Finding the Suitable Fund Share Class for Your Client Fund Style Can Drift Off Course Sticking to Their Style, Through Thick and Thin Marathon Man Growth, With a Chaser A Menu of Ideas to Fill Five Market Baskets Funds: Finding Funds with Conviction Stocks: So You Say You Want Income? All Eyes on China Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities What’s New at Morningstar and on the Web The Advisor’s Economic Moat

Morningstar Advisor - Summer 2007

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