Emerging markets land top
of managers' portfolios with rising rates
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[March 24, 2017]
By David Randall
YORK (Reuters) - Rising short-term interest rates in the United States
are prompting Lipper Award-winning bond fund managers to add
emerging-market debt and non-agency backed residential mortgages that
they say offer more potential for gains in the year ahead.
Managers from firms including AllianceBernstein, BlackRock Inc and
Thornburg Investment Management are bracing for further rate increases
by the Federal Reserve, making U.S. high-yield debt unattractive as
highly-leveraged companies and municipalities have a more difficult time
rolling over their debt costs.
Instead, managers say, emerging-market debt in countries like Brazil and
Mexico that have slowly-stabilizing economies and are undertaking
structural reforms, as well as municipal debt issued by cities like
Dallas that are in the center of strong regional economies, look more
"We are in a phase where diversification is going to be a big strategy"
because there are fewer attractive assets given rising rates, said
Gershon Distenfeld, portfolio manager of the AllianceBernstein High
Income fund. "Our fund was up 15 percent last year and we don't see that
Distenfeld said that he now has about 40 percent of his portfolio
invested in the United States, compared with 75 percent at this time
last year. He has been moving chiefly into both dollar and
local-currency denominated securities in Brazil.
U.S. high yield, by comparison, is "on the rich side now," he said.
High-yield debt, for instance, suffered steep losses as investors moved
to safer assets during Tuesday's stock market sell-off, while
emerging-market debt retained more of its value.
The Fed raised short-term interest rates for the second time in three
months on March 15, and is widely expected to tighten again at least two
more times this year. Rising interest rates push down the price of older
bonds with lower rates, eating into the returns of bond funds.
Mexico looks attractive given its economic reforms, said Bob Miller, the
lead portfolio manager of the BlackRock Total Return fund <MAHQX.O>. The
peso is regaining value following a steep decline after the unexpected
victory of U.S. President Donald Trump, Miller said.
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added that concern about more aggressive trade negotiations between the United
States and Mexico "seems to have calmed down to a reasonable degree."
Miller remained optimistic about the strength of the U.S. economy. "There's no
obvious imbalance" that could point to a coming recession, he said.
Not every Lipper Award-winning bond fund manager is so upbeat, however. Steve
Kane, portfolio manager of TCW Core Fixed Income fund, said that he has just 2
percent of his fund in high-yield debt, and near zero of his fund in
emerging-market debt, because he expects that the U.S. economy is near the end
of its expansion and a recession is becoming more likely.
still finding value in non-agency residential mortgages, however, because he
sees "continuing improving fundamentals even if we reach an economic downturn"
thanks to rising home prices and wage growth, he said. He has also been buying
triple-A rated commercial mortgage-backed securities that have been hurt by
concerns about declining mall traffic in the age of online shopping.
"We are concerned like a lot of folks with the decimation of bricks and mortar
retail, but we don't think we will see significant losses at the triple-A
level," he said.
Chris Ryon, co-portfolio manager of the Thornburg Intermediate Municipal Funds <THIMX.O>,
said that he had been buying shorter-duration bonds and focusing on
higher-quality issues as interest rates rise.
He has been buying general-obligation bonds issued by some lower-rated cities
such as Dallas and Chicago, however, because he sees the issues that have led to
their lower credit ratings as more political than economic in nature.
"They have strong economies and an ability to pay," he said.
(Reporting by David Randall; Editing by Jennifer Ablan and Andrew Hay)
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