We already own quite a bit of preferred shares issued by Annaly Capital Management (NLY), but I'm re...
Time to Change Way of Investing
10/02/2013 6:00 am EST
Marilyn Cohen, president of Envision Capital Management, suggests it might be time to change your way of investing since interest rates have finally begun to rise.
SPEAKER 1: Hi and thanks for joining me. My guest today is Marilyn Cohen. Hi Marilyn. Thanks for stopping by.
MARILYN: Nancy, I’m pleased to be here.
SPEAKER 1: It’s always great to see you. Let’s talk about bonds, interest rates, you know they’ve been really, really, really low for a long time and it seems like a lot of the bond holders are frightened right now, the scurge of rising interest rates is in front of us. What would you suggest for them?
MARILYN: First of all, Nancy, for the last two, two and a half years, people that have attended the Money Show have had one voice, rates have got to go up, rates have got to go up. I mean I heard them singing that from the rooftops and now rates are starting to move up and I say bravo. It’s about time because all of what the fed has been doing has been artificially propping up bond prices as well as equity prices, so what should people be doing? They shouldn’t be freaked out, number one, but they need to change how they’re investing. Most people that got out of stocks in 2008 went into bond funds. Most of them went into long-term bond funds, open end, closed end, exchanged traded funds, leveraged funds, and now they have to change. They have to go into short duration funds to wait out this time in which we see rates reach their pinnacle until it starts choking off the economy.
SPEAKER 1: How short is short?
MARILYN: Well short duration, and again duration means how sensitive a bond or a bond portfolio is to interest rate news, short duration to me and how we manage our portfolios is about three years. In plain non-bond speak it means if interest rates move up 1% and you’ve got a bond portfolio that’s got a three year duration, that’s not maturity, that’s duration, it will be down 3%. Nancy, you wouldn’t be happy but you wouldn’t be bludgeoned either, so that’s what you have to do in order to wait out the fed making rates rise, the economy, the bond vigil aunties. Sentiment has changed in the bond market so I want to have kind of a foxhole mentality so I’ll have enough money when interest rates really go up a lot to extend out and increase that duration and maturity so I can get 100, 200 basis points higher in yield.
SPEAKER 1: Sure, now what about credit quality? I’ve been looking at articles that are saying well now consumers or investors are going out there and they’re getting a little more risky with credit quality chasing yield basically. What is your feeling about that?
MARILYN: Well they’ve been doing that for at least a good two years. They’ve loaded up on all kinds of junk bond funds and junk bond ETFs, and I’m a junk bond advocate but not as far as the whole market is concerned. I like to individually pick out securities that have something unique, a good business model, good cash flow, and I’m not afraid to own junk, not junkety junk, but B, BB, BB+ in which the cash flow makes sense, the business model makes sense and they are suppliers in feeding into a sector of the market that’s doing really well.
SPEAKER 1: Do you do a top down type sector analysis when you’re looking at bonds? Is that how you start?
MARILYN: The answer is I look for ideas and see if those ideas, those credit ideas after doing the credit work, fit within what we’re looking for as far as the sector is concerned, so I wouldn’t say it was so much of a top down. I would say I like automobiles maybe. Who feeds into that? Let me look at different ideas. Whatever you call that, it’s worked for me for 18 years.
SPEAKER 1: Absolutely. Thanks for joining me.
MARILYN: My pleasure.
SPEAKER 1: Thank you for being with us on the Moneyshow.com Video Network.
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