Morningstar Advisor - April/May 2009 - 44

Morningstar Conversation FPA New Income FPNIX $13K BarCap Aggregate Bond enormously large that even with the multiple trillions we’ve spent so far we don’t have anything close to a solvent banking system. Rodriguez: When I look back at the commentary and the testimony of Fed chairman Ben Bernanke in March and April of ’07, when he commented that there will be no contagion for subprime, and Treasury secretary Henry Paulson figuring that he could supersize the SIVs out there to contain the problem. Then, they went to the idea that it’s not just subprime; it’s now housing. Now, the issue is stemming the price fall in housing. They keep underestimating the problems. slivers of hope for investors in an area like this? Gundlach: I think there are, but it comes down to two different categories of markets: the bogadollar markets and the real markets. The bogadollar markets still should be avoided, and that’s just about anything that came into existence to satisfy bogadollar demand, which means leveraged demand or synthetic trading demand—all of this LIBOR plus seven, LIBOR plus 20 garbage that started out life as triple A rated that has dropped from 100 to 90 to 80 to 70 to 60 to 50 to 40. At every single one of those downward increments, there was a parade of owners of those assets saying that these are too cheap to sell. They’re actually still not too cheap to sell. Then, you can go to the nonagency mortgage market, which has its bogadollar components, and they should be avoided—subprime triple A’s at 40 cents on the dollar that pay LIBOR plus seven and option pay ARMs that pay 1% over T-bills and have a negative amortization feature and all kinds of legislative risk because those are the homeowners that claim they were tricked and, therefore, may get legislative relief of some type down the road. All of these things are a danger for those assets. But then you can go to the prime mortgage market, which is where we’ve been playing around in. These are fixed-rate mortgages— the standard, garden-variety, 30-year-amortizing, first-lien residential mortgages on high-FICO-score borrowers that have traded as low as 50 cents on the dollar. Now, those where you’re carrying at 15% cash flow to nearly 20% cash flow on some of those assets are fairly compelling opportunities. Jones: Bob, what do you think about opportuni- 12 11 04 05 06 07 08 09 Category Intermediate-Term Bond Morningstar Rating Expense Ratio (%) 0.61 5-Yr Anl Total Rtn (%) 3.79 5-Yr Anl TR % Rank Cat 9 QQQQ Minimum Investment $1,500 Data as of Feb. 28, 2009. Jan-04 TCW Total Return Bond TGLMX Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Feb-04Oct-04Jun-05Feb-06Oct-06Jun-07Feb-08Oct-08 Mar-04 Feb-05Oct-05Jun-06Feb-07Oct-07Jun-08Feb-09 Apr-04 Mar-05 Dec-05 Sep-06 Jul-07 Apr-08 Mar-09 May-04 Apr-05 Mar-06 Mar-07 Jun-04 May-05 May-06 Apr-07 Jul-04 Aug-04 Aug-05 Jul-06 May-07 May-08 Nov-04 Sep-05 Aug-06 Aug-07 Jul-08 Nov-05 Sep-07 Aug-08 Sep-08 $13KSep-04 Jul-05 Apr-06 Dec-04 Nov-06 Nov-07 Nov-08 Dec-06 Dec-07 Dec-08 Mar-08 12 BarCap Aggregate Bond 11 04 05 06 07 08 09 Category Intermediate-Term Bond Morningstar Rating Expense Ratio (%) 0.44 5-Yr Anl Total Rtn (%) 4.17 5-Yr Anl TR % Rank Cat 3 QQQQQ Minimum Investment $2,000 Data as of Feb. 28, 2009. The Fed dropped rates by 125 basis points in two stages in January—the biggest drop in the history of the Fed—and they basically got no traction. It had to set off alarm bells in the Fed. In my opinion, the Fed, Treasury, and the government have been on totally the wrong road. In this crisis, there have been no decisions made other than ad-hoc decisions, and this says that they don’t have a picture of what they’re dealing with. They can say one thing, but I’ll just look at their actions. They’ve destabilized the banking system. I use as my metric, which is very independent, the KBW Bank Index, and on the Thursday before Bear Stearns went under, that index was just slightly north of 80. Now, think about all of the guarantees, all of the capital infusions, both by the government and by third parties, into the system. The KBW index has set a new low today at 23.80. Jones: Bob, I know you’ve had the buyer’s strike for risk assets in FPA New Income since at least 2005. Rodriguez: Actually, for high-quality assets, about multiple trillions of dollars. The situation Jan-04 a kid down on the beach, digging is like Jan-05 Jan-06 Jan-07 since 2003, June 11. a hole in the sand and trying to fill Jan-08with it up Jan-09 Feb-04Oct-04Jun-05Feb-06Oct-06Jun-07Feb-08Oct-08 Mar-04 Dec-04 Sep-05 Jun-06Feb-07Oct-07Jun-08 Mar-09 Apr-04 Feb-05Oct-05 Jul-06 Mar-07 Dec-07 Sep-08 May-04 Apr-05 Mar-06 Dec-06 Sep-07 Jul-08 Jun-04 May-05 Apr-06 Apr-07 Mar-08 Jul-04 Aug-04 Jul-05 May-06 May-07 Apr-08 Sep-04 Aug-05 Aug-06 Jul-07 May-08 Nov-04 Sep-06 Aug-07 Aug-08 Nov-06 Nov-07 seawater. He fills up his bucket, runs backNov-08 to Mar-05 Dec-05 Nov-05 Dec-08 Feb-09 Jones: Jeffrey, I know in TCW Total Return, in ties in the market today? Rodriguez: We haven’t been prospecting down where Jeffrey’s been talking about. We’re finding what I would call “pockets.” Because of the hole, and dumps in the water. But every time he comes back to the hole, all the water’s gone. We’re doing the same thing. We’re throwing buckets of cash into a hole that is so contrast, you found some opportunities in 2008, specifically in the nonagency mortgage market. These are highly rated securities that have been beaten down. Are there little 44 Morningstar Advisor April/May 2009

Morningstar Advisor - April/May 2009

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