Meet the Street: Taking the Measure
of Muni Bonds
By Yoon Cho
Today's MEET THE STREET features Clark Stamper,
the portfolio manager for Evergreen High Income Municipal Bond, to find
out where he's putting his fund's money and his thoughts on how 2002 will
shape up.
Fund tracker Lipper ranked Stamper's
fund No. 1 over the three-year period ended Dec. 31, 2001, in the
high-yield category. For that period, his fund was up an annualized 3.90%;
for the year 2001, it gained 5.31%.
Here he discusses his fund's currently
defensive posture and why he's expecting a prolonged U.S. recession.
TSC: How do you assess the
investing backdrop against which your fund has performed? Could you talk
us through your investing strategy this year?
Stamper:
We try to maximize our risk-adjusted performance by focusing on upside
potential and downside protection on each investment decision made. We
look at characteristics including credit quality, interest rates, coupons
and maturity.
Credit quality and yield spread -- the
differential between the yields of, say, triple B bonds and triple A bonds
-- have been very tight in the muni universe for some time. While we are a
high-yield fund, our average credit quality has been quite high. We have
raised our average credit rating for the bonds we own from single A-minus
a few years ago to double A-minus this year, right before 9/11.
We are defensively structured in terms
of credit quality and plan to remain this way for some time. And we
continue to seek out opportunistic investments offering attractive deals.
For example, I have bought some bonds
backed by USG (USG:NYSE)
-- they're in bankruptcy. They're a world-class company but got into
trouble because of asbestos litigation. I had bought it before the company
went into bankruptcy, and even after the bankruptcy the price was going
up. I intended to hold on to these, but after 9/11 we became more
defensive, and we sold this one, with some profit.
TSC: How do you play the bond
market?
Stamper:
We're taking significantly less interest-rate risks than the wider
markets. We're also a short-term fund, according to Morningstar. To be in
this category, the average duration of coupons needs to be less than 4.5
years.
We own a lot of cushion bonds, big
coupon bonds trading to a short call [that protects us if prices drop] .
Our income is significantly more than a current coupon bond, which would
be a bond trading at par without any special bells and whistles. In other
words, we have not been getting much capital appreciation, but it's been
more than offset by the huge income we have been earning.
This is a much more defensive and
stable posture. We outperform as the market drops due to credit quality or
interest rates going up, but we typically underperform as the market
rallies.
TSC: What is the typical percentage
breakdown of your bond holdings?
Stamper:
The dividend yield on average for our fund is 4.73%. That's relatively
high -- in the 74th percentile for Lipper's high-yield muni fund category.
Now, if you want to make that into pretax equivalents compared with
Treasuries, for example, you divide [dividend yield] by 1 minus your tax
rate. Say, we use 38.6%.
So, if you divide 4.73% by 1 minus
0.386, you get a 7.7% pretax equivalent. That's a pretty big yield for a
fund with AA holding of four-year duration. You compare this with the
five-year Treasuries, which yield only about 3.62%. So our fund is
offering 408 basis points more than the Treasuries market.
An average muni bond is only about $10
million to $15 million in size. But there are a huge number of them. This
allows for different kinds of opportunity. So we are scouring the market
everyday. We have over 460 bond positions in our fund right now. We're
highly diversified and are in all states.
One thing to remember is that bonds
are forced to [a given level] by the coupon and maturity and the calls;
and that their downside and upside characteristics change depending on the
price and where the relative investments are. And these are what we focus
on constantly.
TSC: What are the high-quality
bonds you're looking at? Any particular states?
Stamper:
I am looking at single A or better. There are two types of munis: One is a
real muni, which is a bond issued to finance a sewer system, say.
The other type is the industrial revenue bond, which is backed by a
corporation, whether in utilities, health care, etc. These are the type of
bonds I specialize in, and our fund owns a lot of these.
Our portfolio consists of 8% in
generic bonds -- general obligation bonds, which are backed by the taxing
power of the city -- and the rest in industrial revenue bonds, with 22% in
health care, 11% in housing, 12% in utilities, 17% in similar revenue
bonds. We like health care here.
TSC: What's your outlook for 2002?
Stamper:
I think that we're going into a prolonged recession here. I used to work
in the junk-bond taxable market. The spreads started widening in 1998. And
those credit spreads -- the difference of the yield between AAA and junk
bonds -- have become wider than they ever were in the last recession.
Also, Greenspan has lowered rates 10 times without very much success.
The tech boom, in hindsight, was a
huge misallocation of resources. The Internet may have increased
productivity, but this might also be contributing to deflationary
pressures, which were reflected in the big drop in the producer price
index. We have also been seeing huge drops in rental prices and increasing
vacancies.
I also look at Japan where the yield
curve is essentially zero, but still their economy is having many
problems. All of this leads me to think we're heading for a pretty nasty
time ahead.
I believe over the long run, interest
rates -- especially on the long end -- will be drifting upward. I am in
the minority for believing that. It has to do with the dollar. I believe
that there will be some shift out of the dollar and into the euro, and
perhaps into the yen. When this happens, people are usually selling bonds.
And this will help push the rates up.
We might also see this when we have
stimulus programs to reignite the economy, and we'll definitely see a
decrease in tax revenue, which will lead to more issuance of bonds, not
less. |