Municipal bond insurance companies such as AMBAC and MBIA, despite being downgraded by the rating agencies, should generate large amounts of cash, he adds.
On the stock side, the Third Avenue fund is investing in beaten-down, well-capitalized stocks in North America and Asia, and these make up about 70% of the portfolio.
At midyear, for example, the fund bought Sycamore Networks, a leading telecommunications equipment manufacturer. Whitman snapped up shares at close to the amount of cash on the company's balance sheet, less its liabilities. Other large stocks selling below his net asset value calculations are Cheung Kong, Henderson Land Development and Toyota Industries.
"Distressed securities seem to be trading at ultra-attractive prices," Whitman says. "Discounts have widened for common stocks of very well capitalized companies where the common stocks are trading at meaningful discounts."
On the fixed-income side, Dean Di Bias, high-yield portfolio manager with Advantus Capital Management, St. Paul, Minn., said higher quality mortgage bonds and asset-backed securities are a good buy. He's snapping up the best tranches in poorly performing pools.
"We believe value is waiting to be discovered in the non-agency mortgage and asset-backed securities markets," he says. "A growing number of sellers have pushed prices down and substantially increased yields on what were recently considered very high quality and safe investment-grade debt securities."
Di Bias, for example, said that a seasoned BBB-rated subordinated security issued by a well-known issuer has "excellent fundamentals and credit metrics, yet trades at a higher yield than B-rated corporate bonds."
Although there are tons of distressed securities in the market, Franklin Templeton's Shawn Tumulty, head of the Mutual Series' distressed securities team, says there is still substantial downside risk. As a result, the Mutual Series funds are investing in collateralized senior bank loans.
"We see more opportunities in stressed as opposed to distressed assets," he says. "Most value has been placed on senior secured loans. The default rate remains low, but that could change in tight economic conditions."
Tumulty says that the unsecured debt can't be priced accurately and the downside is uncertain. By contrast, secured debt with asset coverage can be priced based on replacement value.
For example, the portfolio manager recently purchased Calpine at just 70 cents on the dollar. The paper is secured by state-of-the-art gas turbines used in generating electric power.