This week, I’m going to tackle a natural follow-up question to last week: What’s behind ...
3 Energy-Sector Bond Picks
02/07/2012 6:30 am EST
These under-the-radar names pair guaranteed income with the continuing bull market in commodities, says fund manager John Lekas. He also tells MoneyShow how the domestic and global economic picture affects his outlook for fixed income.
John, I see that your fund has a heavy weighting in corporate bonds. Tell us a little bit today about some of the areas within that asset class that you like in particular.
John Lekas: Within the asset class in particular, we like the financials and we like commodities.
That is really what has propelled us to the No. 1 spot, at least year-to-date anyway. We did almost 5% last month, and that was primarily due to the increase in the financials, as well as the commodity exposure.
Kate Stalter: So tell me a little bit in each of those. What it is that you see as being advantageous at this point?
John Lekas: I think that Europe is turning around, and I also think that the Fed is on a low dollar policy, and is also determined to get the housing market turned around. Therefore, with the low dollar, all commodities are traded in US dollars.
And so as the dollar moves down, commodity prices move up. I think we intend to continue to print money through this election, and so you’ll see commodities move higher—and that’s everything from corn, tin, oil, gas, etc.
Kate Stalter: I’ve seen you in other media and I believe that you had talked about metals in the past. Is that still an area that you like? Or are energy-related bonds among the investments you’re in at this point?
John Lekas: You know, two in the energy sector that we like in particular are Alpha Natural Resources (ANR), which is the company that bought Massey Energy. That’s coal. That’s really a pure coal play, and we like the Alpha Natural Resources 2.375% convertible bond.
We in particular like the Peabody Energy (BTU) 4.75% convertible. For example, in that case I get a 4.75% coupon, and in addition to that, I’m senior to the preferred and the common holders. As well, as the stock price moves up, so does the value of my position. So those are the kind of plays that we like.
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In addition, one that’s a little off of the radar is the Venezuela 12.75% coupon due in 2022, trading actually around 94 cents on the dollar, which gives you almost a 14% return on your money. With the fact that [Hugo] Chavez is very sick, who is the leader down there.
On top of that fact, commodity prices should continue to move up, and Venezuela is the second largest importer of oil into the US. We think that’s a pure fixed-income play based on commodities if you will.
I think those are three good, actionable ideas.
Kate Stalter: Venezuela is certainly probably one that you noted would be off the radar that would not come to top of the mind for most people.
Speaking of what would be top of mind for individual investors: as you well know, most people, when they think of mutual funds, they probably think of equity funds. What should people know about the fixed-income side?
John Lekas: There are basically two risks. You have interest-rate risk or you have credit risk. In our fund, we have mitigated almost all of the interest risk—not all of it. We measure that in terms of what we call duration. So as interest rates move up, if you own bonds, they’ll go down in value.
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If you, in fact, own names like financials last year, whether the interest rates went up or not, the value of those went down on concerns that maybe Europe was going to take them down, or they were not going to be able to pay.
So there are really two areas of risk in a bond mutual fund, and that’s your interest-rate risk and your credit risk. In our particular situation, we have elected to take a lot of the interest-rate risk out, because we’re bullish on the market, and therefore we’ve taken on more credit risk vis-a-vis the corporate bond and convertible bond market.
And that’s in essence your two risk categories. Some people have a substantial amount of both.
Kate Stalter: Now, you just mentioned that you are bullish on the market. Is that a short-term view? Longer-term view? How would you frame that?
John Lekas: I would say longer term is difficult, as you know. I’m trying to predict things out a year. You know, we’ve got an election year. We’ve got the situation in Europe. We’ve got an economy that, in the US, hasn’t done much for almost ten years, actually.
I’m just going to keep it to this year...but at this point, we are bullish looking out. As when I mentioned the low dollar, I think we will move commodity prices up, and hence the equity markets, and also put us in a position to begin exporting against them.
My number on the Dow at the end of this year is 15,250. And the S&P is 1,550 and on the Nasdaq it’s 3,250. That’s just based on fifteen times earnings.
We also believe that GDP will exceed 3%, so we’re more bullish than probably most. So we would be buyers here.
Whether it’s conservatively doing it the way we do, or whether you just want an all-out equity play, I do not think the volatility will go away. I think you’ll have ups and downs, and that’s why I have a propensity, obviously, to the fixed-income component of the market, meaning corporate bonds and convertible bonds, but you could buy the outright equity.
We think the housing market bottomed. Europe, which there has been a lot of hoopla about, we think, is actually in far better shape than people give it credit for. I’ll just give you one easy number: In the US, our debt-to-GDP is 101%. In Europe, it’s about 85.1%. Their total debt-to-GDP, and that includes Greece, Spain, Italy, Portugal, etc.
What that tells you is they have a lot of room to print a lot of money, and I think they are going to do that. So I think Europe is well on its way to resolving their problems. I think we will make a bottom in the housing market. Those are two major components for the stock market in terms of getting by bad news.
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