A fund play he likes for yield is the $2.9 billion Thornburg Investment Income Builder (TIBAX), a global equity fund with a touch of bond exposure. Focused on large-cap value companies with strong earnings and solid franchises, the fund has lost more than one-third so far this year. But this has pushed its yield to 7%.
Leo Marzen, partner at the New York City-based Bridgewater Advisors with $700 million under management, is looking to swap out of some of his actively managed equity funds and into indices. For example, he has sold out of his 5% position in Chesapeake Core Growth Fund (CHCGX), which has seen five years of gains wiped out by its 2008 year-to-date loss of 42%. He's shifting into the DFA US Core Equity Fund (DFEOX), which has outperformed Chesapeake this year by 10%, has an expense ratio that's 111 basis points cheaper and has a yield that's 172 basis points higher.
"Not only is the swap allowing us to lock in a tax loss and avoid taxable distributions," explains Marzen, "but we are using the opportunity to reposition these assets away from a large-cap growth bias to a fund that has a tilt toward smaller-cap value shares."
Marzen is also attracted to closed-end funds that invest in master limited partnerships, specifically energy pipeline businesses that generate consistent cash flows. He likes Kayne Anderson MLP (KYN), a closed-end fund that's currently yielding 10.53%.
Lord Abbett fixed-income strategist Zane Brown sees clear dysfunction and opportunity in the high-grade bond market, where fear has trumped fundamentals. He points to the irrationally small and negative yields on short-term Treasurys. During major periods of disruption, he would anticipate high-grade corporate spreads to move from around 80 to 130 basis points above Treasurys, not into the 400-plus basis point area that we've been seeing.
Brown is recommending high-grade, ten-year maturities because of their extensive offerings and liquidity and because they capture most of the yield curve with less volatility than longer maturities. His biggest concern is that "both institutional and retail investors ignore the major government initiatives and convince themselves that a Great Depression-like market is inevitable."
Across the Atlantic, Morgan Stanley's European strategist Teun Draaisma believes that "despite the bad fundamental outlook, prudent investors should not be short equities and long-term investors should start averaging in." The reason is that four key market indicators-valuation, capitulation, risk and fundamentals-are all flashing "buy." When this has happened in the past, markets typically rallied over the next six months.
Despite the sheer scale of the sell-off-with equity valuations sliced by one-third, cheap-looking commodity prices and high-grade corporate bond yields that look like a once-in-a-generation opportunity-advisors must remember that this crisis is unlike any we've ever known. The behavior of previous bear markets may not mean anything if the underpinning of our economy continues to erode. "It's better in this kind of environment to be sure the knife has hit the floor rather than trying to catch it on the way down," Weiner says.