Greg Habeeb has been a portfolio manager for nine years, over seven of which he has spent at Calvert. He also spent 10 years on the sell-side as an options analyst and trader with PaineWebber. He oversees $3 billion in taxable fixed-income assets and manages six different funds.
Describe your investment philosophy regarding corporate bonds.
The style has somewhat changed. Probably our theme has always been looking for the undervalued or overlooked types of securities, and we had considerable success with identifying those and holding those positions for my first five years at Calvert. But, the market really has changed over the last couple of years where making a mistake was so brutal that although we still look for those opportunities we demand a much heftier concession for the illiquidity usually associated with these kinds of things. And now, instead of having a select few names of large size, we'll have 20% of the size and five times as many names. So it's still the same theme, it's just that the parameters have changed rather dramatically. The plain vanilla stuff only interests us if we think its cheaply priced, and there are a few names like that but not that many.
What percentage of your taxable portfolio is in corporates right now?
65%
That sounds like a substantial corporate allocation. Are you typically well overweighted, or is that the upper range of corporate exposure you like to have?
That's the upper range.
Why do you feel that corporates offer so much value right now? Are you looking at reducing exposure?
We've been downsizing actually and most of the stuff we own is very high quality stuff: a lot of it is insured paper and a lot is money market paper. So, we're taking on much less risk than you might think from looking at that number.
Where are some of the places in the corporate bond market where you feel it's appropriate to take some risk because the reward is substantial?
Autos. There's no doubt there's risk there, but the level of yield seems to be reasonable to compensate you for bearing that risk, especially in a market that has richened substantially in the last five months. That sector stands out as very cheap relative to the marketplace, albeit with some risk. There's nothing 400-500 off like Ford [Motor Co.] is that's investment grade at this point.
Is this particularly true of Ford, or are all the autos as cheap in your view?
I think the sector in general is cheap, with Ford being by far the cheapest, but of course also with the most risk. The sector is substantially wider than any other sector, with the possible exception of the beaten up energy sector, and most of those credits aren't even investment-grade any more.
Some people in the market seem to feel issuers like Ford will never trade as tight as they have historically.
And they may not and that's why they're at these levels. But, if they just stay at these levels that's not a bad coupon to clip in a world where Procter & Gamble pays you 70 over Treasuries. Also, a substantial portion of our exposure to autos is in money market and short dated paper, so we're not taking on all that much risk. If you look at just a name and the percentages it might be deceptive.
If Ford tightens to 200 do you start to sell?
The trigger would be less than that. If it tightens 100 basis points, we'd probably start to lighten up a bit.
Tell me about some of the off-the-run names where you see value?
There's one name that just came [last Monday] that we're fond of: Markel [Corp.], an insurance company in Virginia. We've bid on a couple of their deals. They did a 10-year reopening at 290 off. We thought there was a lot of value so we purchased that. Another off the run name we've had for a long time is Interpool [Inc.]. That's actually rallied a lot and we've lightened up a little bit. We bought bonds in the 50s and 60s at one point and the bonds are trading in the 80s and 90s. We're still comfortable with the credit.
Sovereign Bank is another name we like that has rallied substantially over the last year, maybe to the tune of 200 basis points, and we have moderate-sized positions now as we've taken advantage of the rally in that name.
Some insured paper we have is Pedernales [Electric Cooperative], which is a utility in Texas. This is a name we're not actually in love with, but the paper is insured so its triple-A rated. We have a decent sized position in those. At one point we had a 4% position we liked it that much, and then it rallied and now we have about a 2% position.
Which firms on the sell-side provide you with the best service?
We've been blessed with great relationships with Wall Street and we have a lot of firms that provide us with exceptional service, especially Lehman Brothers, Merrill Lynch, Citigroup, Goldman Sachs, J.P. Morgan [Securities] and Credit Suisse First Boston. And, we have an excellent sales force covering us across the street.
Any salespeople you want to single out as being particularly good?
Quentin Murray at Lehman, Dave Murphy at Merrill Lynch, Bobby Stevenish at Citigroup, Lenny Pasciucco at J.P. Morgan, Rich Joyce at Goldman and Rob Lynn at First Boston are some of the standout salespeople that cover us.
Do you ever use the services of some of the smaller dealers?
In general we feel many of the small firms have a lot to offer, because they have customers who will take the other sides of a lot the things that we're trying to do that we don't see from some of the bigger shops. Also, they seem to be able to work the off-the-run situations better: they're willing to dig in and do all the dirty work associated with an off-the-run name where a lot of the bigger firms will automatically dismiss some of the off-the-run names. So, you can often go to the little firms and they'll spend hours if not days working a situation for you. They provide a very useful function for us. They add a lot to the liquidity of the marketplace. And, we have some exceptional smaller firms that do a lot of business with us and we're very pleased with that. We talk to a lot more firms than most places. It's a bit of a time drain for us, but we've made that commitment because we've realized the value of maintaining those relationships.