Kevin Miller, CEO and CIO at the E-Valuator Funds, believes investors should extend their bond duration at this point in time. “Get into five to 15 as far as duration. I say that based on the assumption that you’re not going to need to be liquidating the bond in the near future.”
He likes the health-care industry among other spots, since many companies are going to have to build out their infrastructures with debt to serve the health needs of the baby boomers, 10,000 of whom are retiring every day. He says an investor could consider Medtronic, for example, as a good company with a strong cash flow and a potential for resisting recession. Procter & Gamble is another standby. “In a recession, everybody still needs to clean their clothes and wash themselves and shave. [P&G is] very diversified. They have a nice yield.” Utilities are a good fallback position as well in recessions, he says.
Young describes Villere as a “middle tier” management shop, handling $2 billion, about $400 million of that in bonds, especially corporate bonds. He says there’s huge demand for investment grade bonds among institutional investors and smaller investors have to ask for more than they might want to get what they need. “We get a fraction of what we ask for, so that forces us to ask for a little bit more.”
The fund recently bought 2019 bonds for agricultural chemical company FMC; the 3.20% coupon matures in 2026. Young says the trade wars might have spooked some investors away from this company, which has Chinese suppliers, but that has only boosted the payout. “They paid a seven-year bond, 147 basis points over governments,” Young says. “It’s a good company without too much debt, but obviously the market right now is a little bit worried about how they are going to be affected by the Chinese tariffs. If they had issued this a year ago, they would have paid 130 [points] over as opposed to 147. That’s somewhat miniscule, but that’s an opportunity.” He also likes high-yield 2027 bonds from manufacturer H.B. Fuller, a 4% coupon with a yield that offers a better spread over Treasurys, as much as 300 basis points.
It should be noted that high-yield in general has benefited from wider spreads, but as those spreads tighten, observers warn they might not be as worth the risk for what you’re getting over investment grade names. High yield also tends to suffer in recessions.
While the inverted yield curve might give investors worry that recession is imminent, McMillan says not so fast. “Basically the yield curve when it inverts, typically a recession is still a year or more away. We’re only a couple of months into the inversion [as of late September] and the 10-2 curve isn’t inverted at all at the moment. So yeah we’re probably looking at a recession in the next year or so from that, but that’s by no means guaranteed.”
Commonwealth, in its 70-plus allocation models it offers to advisors, is staying within low to mid-duration bonds since the firm thinks rates will drop further. And as far as bond credit is concerned: “What you’re getting paid for going down the credit ladder is fairly low,” says McMillan. “So we’re lightening up on low credit exposure.”