Who doesn’t love a bargain? Scoring something sought-after at a discount can be as thrilling for shoppers on Main Street as deal-hunters on Wall Street. Ferreting out finds takes time, though, and not everyone has the patience—or the resources—to do that legwork. But Katrina Dudley, portfolio manager with Mutual Series® , is a savvy stock shopper with ample amounts of both. Read on for a taste of her stock-picking approach as inspired by the Mutual Series’ guiding principle: “buy a dollar’s worth of assets at a discount.”
- Macro considerations are important, but they don’t change our stock-by-stock selection process
- Volatility is here to stay, but it can create opportunity
- We’re looking at the company-level impact of macro influences like eurozone austerity
- Many European companies are readjusting their cost base, becoming more competitive Read more…
There was once a time—perhaps not too long ago—when fixed income markets were considered to be the unobtrusive, quiet guest at the dinner party. If equity markets were seen as raucous and exciting, fixed income was instead the steady, sure friend who rarely caused any commotion.
My, how things have changed.
Today, much of the investing world’s news is focused on unexpected developments in fixed income. Roger Bayston, Director of Fixed Income for the Franklin Templeton Fixed Income Group®, chatted with us to discuss some recent fixed income themes.
Beyond Bulls & Bears: Roger, the European sovereign debt crisis has really been dominating the news lately. How do you see that impacting U.S. fixed income markets?
Roger Bayston: Concerns over the European debt crisis and related worries regarding a possible restructuring of some financial institutions’ debt holdings— or even some countries’ sovereign debt— raises questions about expected growth in the United States. That feeds into a cycle where risk-based assets are generally avoided, credit spreads increase, and some investors lose their comfort level in investing in riskier assets. In addition, as investors shun what they perceive as risky assets, there has been a flight to assets seen as safer— such as Treasuries. This has kept long-term U.S. government interest rates low, despite the recent credit downgrade.
Beyond Bulls & Bears: Are you seeing any impact as a result of the Fed’s “Operation Twist” on U.S. mortgage rates?
Roger Bayston: “Operation Twist” basically means they’re going to be buying longer-term U.S. government debt in an effort to keep long-term rates low. Essentially, now that the Fed has arrived at a zero interest rate policy on short-term rates, they are continuing just to reassure the market that they will serve as the buyer of last resort, to make sure that monetary policy remains intact, that they are going to be supporting the U.S. financial institutions and the U.S. economy by attempting to keep longer-term interest rates down.
It does help the economy on the margin by keeping other borrowing costs to corporations as well as mortgage financing rates for U.S. households at a lower level.
Beyond Bulls & Bears: Where do you see rates and credit spreads heading next? And where are you finding value?
Roger Bayston: We know the Fed’s already told us that short-term rates are not going to go anywhere anytime soon. I think, by and large, we are going to be in several months of uncertainty related to the resolution of the European sovereign debt crisis and some of the financial institutions in Europe that need to be restructured. During this period of uncertainty, I believe credit spreads in the U.S. are going to remain relatively wide versus the fundamentals and we should see some opportunity due to this dislocation.
Beyond Bulls & Bears: Given current market conditions, what’s your outlook as we head into the end of the year?
Roger Bayston: The market seems to be pricing in a recession in the U.S. and much higher default rates on corporate credits than what the fundamentals suggest. Many corporations in the U.S. are showing resiliency in their balance sheets; they have deleveraged over the past several years, so we are seeing opportunities in certain credit investments.
We expect that we are going to have a bumpy ride in the fourth quarter, but we think that getting the income benefits from those corporate debt securities may be a good opportunity right now.
Additionally, we continue to like some global investments, and we think diversification in global fixed income right now makes a lot of sense.
Beyond Bulls & Bears: It always comes back to diversification. Thanks Roger.
Until next week, Beyond Bulls & Bears leaves you with a quote from Sir John Templeton:
“To avoid having all your eggs in the wrong basket at the wrong time, every investor should diversify.”
IMPORTANT LEGAL INFORMATION
Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. The use of derivatives and foreign currency techniques involve special risks as such techniques may not achieve the anticipated benefits and/or may result in losses. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value.
As global markets are roiled by some serious concerns, we at Beyond Bulls & Bears feel it’s a valuable time to take a deep breath and reflect on the sources of potential. After all, the late, great Sir John Templeton believed that for the astute and patient investor, times of maximum pessimism could yield great values. We caught up recently with Research Analyst and Portfolio Manager with Franklin Equity Group, Par Rostom, to discuss the strategies he’s employing to find value.
Beyond Bulls & Bears: You and your team focus on non-US, mid- to large-cap companies with long-term growth potential. What kind of growth potential are you seeing in that segment of the market today?
Par Rostom: We are seeing some pretty good potential in companies earlier in their life-cycle of growth. These companies have focused business models with generally one or two business lines. Our strategy reflects a barbell approach of investing in higher and medium growth companies. The higher-growth companies on one end of the barbell may have more volatile growth from year to year, and the medium-growth companies on the other end of the barbell usually have a steadier growth outlook. Read more…
Portfolio Manager Lisa Myers is a bit of a whiz kid, having done everything from practicing corporate law in New York to teaching legal writing and research at Georgetown University Law Center. Today, she manages billions of dollars for Franklin Templeton. Beyond Bulls & Bears had the rare pleasure of an in-person chat with Lisa recently and got to learn a bit more about who she is beyond the desk.
Beyond Bulls & Bears: Lisa, your background is really quite varied and it even includes a law degree. We’re just curious – how is it you first came to be interested in investing? Read more…
Remember when you were a kid, and your parents warned you not to blindly jump off a cliff just because everyone else was doing it? The grown-up version of that home-spun adage might also include a warning to not blindly dump assets just because every other investor seems to be. But many risk-averse investors seem to be doing just that. Some recent trading days have seen nearly all stocks – even those of healthy companies — being sold. This is unusual, says Portfolio Manager, Ed Perks:
“Things like all 500 stocks in the S&P 500 declining on the same day — this is not something we have seen much historically — and that actually happened over the last month. The correlation amongst stocks is rising to near all-time record levels.”
It’s hard to imagine a scenario in which every stock in the S&P 500 is legitimately worth selling. Professional money managers understand that sentiment can often drive markets – and when that sentiment turns negative, investors may not give even healthy assets a fair shake. But this can create opportunities for those willing to take a deep breath and look closer before selling assets. As Perks notes:
“We are very focused on applying our fundamental research – equity and credit research – to identify opportunities, because when you have these mass, correlated movements, there is likely some opportunity to find value within.”
Market sentiment is such a powerful force that it may even create self-fulfilling prophecies. The European sovereign debt crisis, Perks argues, may even be exacerbated by a vicious cycle involving negative sentiment, as fears of sovereign defaults reverberate into the banking sector. The banking sector then becomes another source of potential trouble and contagion in the unfolding crisis: Read more…
Recently, some analysts and financial professionals have argued that the significant uncertainty plaguing the global economy is to blame for the dramatic volatility in markets. This uncertainty is felt in everything from fears of a “double-dip” recession in the U.S., to turbulent Asian currency markets and the ongoing European sovereign debt crisis. Dr. Michael Hasenstab, SVP and Co-Director, International Bond Department, Franklin Templeton Fixed Income Group® took a few moments recently to help us make sense of these situations.
On the European Sovereign Debt Crisis:
S&P’s recent downgrade of Italy’s sovereign debt sent shock waves through markets as fears of contagion spread. But Dr. Hasenstab does not believe markets should view Italy’s debt situation as equivalent to Greece’s; Italy, he says, is in better shape:
“In the last couple of decades, Italy has actually undertaken pretty significant fiscal reform efforts to stabilize its debt-to-GDP ratio, unlike Greece which was on an explosive and expanding path. It’s true the level of debt is high in Italy, but it’s also stable, and it is true that growth rates are fairly low, but they have also been fairly responsible in running good fiscal balances. So, the debt conditions in Italy are nowhere near as problematic as they are in Greece.”
As contagion fears spread, however, investors shun the debt of countries they perceive to be at risk, driving up those countries’ interest rates. This makes debt harder to service, turning the risk of contagion into something of a self-fulfilling prophecy. But even if market conditions were to pressure a large major borrower like Italy, Dr. Hasenstab thinks it’s unlikely this would result in a systemic crisis:
“The European Central Bank has shown willingness when necessary to intervene in the government bond markets to prevent contagion effects from impacting countries that are not actually insolvent. Most importantly, it is providing a tremendous amount of liquidity to the banking system. It is true that European banks are a bit more credit-constrained than those in the US because they haven’t made a lot of the writedowns, but they also have tremendous access to liquidity, and the capitalization of the major European banks is certainly adequate. So, provided the ECB continues to provide a ring-fence, the situation in Greece is unlikely to be systemic. It is going to be volatile… and there certainly are tail risk events that we are monitoring very closely. But, I think it actually could be a positive event for Europe to move beyond this. The market is already pricing in a significant restructuring so it wouldn’t necessarily become a surprise and as long as the ECB is there to provide the backstop and prevent contagion, we think it’s manageable.”
If you’re feeling a little motion sickness from the recent market volatility, you’re probably not alone. Investors have been on a wild roller coaster ride in recent days, as markets have careened through extreme highs and lows. But Chris Molumphy, CIO of the Franklin Templeton Fixed Income Group®, notes that these large market swings may not perfectly reflect the underlying market fundamentals:
“We certainly have witnessed significant volatility, and in many cases, changes in levels and valuations in the financial markets over the past several weeks. However, it’s important to recognize that relative to just three weeks ago, the world in economic fundamentals has really not changed that dramatically. It’s really been the financial markets – and in particular investor sentiment- that has changed.”