“We have plenty of dry powder for when interest rates rise. At the same time, we’re sticking to a laddered discipline. We’re searching for underpriced bonds.”
“There are always one-off opportunities that represent anomalies, so we can still generate good returns, but not as much as in prior years,” Gonze added. “When we buy investments, we don’t buy a monolithic security called ‘the market’ or ‘the index’—we buy specific securities, and sometimes those securities are better than what one might guess by looking at broad index data.”
He said Thornburg continues to see value in health care, utilities and so-called “kicker bonds,” a special type of bond with a premium coupon and a short call date; it is indigenous only to the muni market.
Lon Erickson, a managing director and co-portfolio manager of the Thornburg Limited Term Income Fund (with $450 million in assets under management), warned investors away from debt issued by technology companies. “Tech changes occur rapidly and are difficult to forecast,” he said, using Apple’s recent stock slide as an example. “We don’t want to compound business risk with a lot of financial risk.”
What's A Bond Investor To Do?
Erickson had the following recommendations for investors in fixed income going forward:
First, investors should select investments with less risk. The firm recommends a time horizon of two to three years for securities.
Second, investors should stay diversified along different segments of the municipal yield curve. They should reduce risk by overweighting the less risky segments of the muni market.
Finally, he reminded investors of one of the main reasons they need fixed income as part of their portfolios -- to stay diversified by asset classes and to have asset classes with little or no correlation to equities.
In a brief Q&A period, Brady was asked what will happen when interest rates rise. “Dogs will be eating cats,” he quipped.