Five Questions for Greg Hopper
The manager of Julius Baer Global High Yield discusses the high-yield bond market -- and where he thinks it's going.
Greg Hopper has managed the Julius Baer Global High Yield bond fund (symbol BJBHX) since its December 2002 launch. The fund has returned 6% over the past year, and it's returned an annualized 14% over the past three years, beating its benchmark, the Merrill Lynch Global High Yield index, in each period.
We sat down to talk in a conference room at Julius Baer's midtown Manhattan offices in late March, just moments before the Federal Reserve was scheduled to announce its latest interest-rate move. After excusing himself to take a cell phone call from a colleague, and satisfying himself that new the Fed chairman Ben Bernanke had done nothing wildly unexpected, we began the interview. (Readers who are unfamiliar with the bond market should keep in mind that interest rates and bond prices generally move in opposite directions.)
Kiplinger's: While the topic is fresh in your mind, can you discuss how rising interest rates affect the high-yield sector of the bond market?
Hopper: Within a certain range, it will affect the very high end of high yield. One result of the tightening is that we've had double-B, very-high-quality bonds like Fisher Scientific, for example, trading at 150 basis points [one and a half percentage points] over Treasuries, which is really sort of an investment-grade kind of spread. As rates move up, those bond yields will tend to move a little bit with them. They still will not fall [in price] as much as Treasuries will in a rising interest rate environment.
But away from that very high end, and within a certain range, interest rates are sort of random noise. A significant shift would be a different story. If interest rates were very quickly up 100 basis points, that could affect high yield. High yield would still be much better than other fixed income, definitely. But from an absolute return perspective, they would suffer some small losses until that coupon caught up with your capital losses over time. That's one of the beauties of high yield. You always have this high yield constantly coming in so you can incur short-term losses much less painfully than you can with higher-grade securities. That coupon will make up for the loss in a faster period.
At the beginning of the year, many market forecasters were pessimistic about high yield, but so far they've been wrong. What happened? High yield is the asset class people love to hate. They only like it once in ten years, and even then they don't normally have the courage to actually buy it. They like it because it's yielding a lot, maybe 1,000 basis points [10 percentage points] over Treasuries, and they know that that's cheap and they should be buying. But when that's happening, it's usually because there are dark storm clouds outside and everybody's thinking it's going to get worse. And high yield has a habit of snapping back very quickly, at which point people either sell it -- if they did in fact buy it -- or they say, "I didn't buy it when it was really cheap. I'm not going to buy now that its not cheap anymore." And they spend the next nine years saying high yield is too rich.
The fact of the matter is that high yield spends a lot of time in a relatively stable kind of range trading environment where it's giving you 300 or 400 basis points over Treasuries. If you don't own it, you're giving up that yield. Unless you think either the economy is going to hell in a hand basket (in which case you want to own Treasuries) or you think the economy is about to take off (in which case you want to own equities), the longer you go not collecting that yield, the more it's going to hurt you. Barring some change in the environment, high yield will continue to bump along.
With spreads generally tight, where are you finding value? We, like many firms, are constructive on energy. We've been overweight energy and still are. We are not as overweight, but are still finding value, in local-currency sovereign issues. Indonesia and Uruguay are the two prime ones right now. We had other countries, but we pulled back a little bit.
We believe there are a number of really constructive long-run trends occurring in emerging markets. A big part of those constructive trends has to do with fact these currencies are free-floating, more or less. Fixed exchange rates and capital controls are being increasingly loosened, which we believe is a healthy policy initiative. It is part of a bigger package of policy changes that have been occurring in some of these countries for many years and is slowing beginning to bear fruit.
Haven't emerging-markets bonds become pretty rich? I would agree with that in terms of hard-currency emerging-markets bonds. We haven't held any hard-currency emerging-markets sovereigns for probably 18 months now. We've held corporates but not sovereigns. That's why we looked more to local currency bonds, for example in Colombia, which we don't own now. But we bought Colombia local-currency bonds at a 12.5% yield in the peso and sold them at about 7.5%. We believe that's the kind of place to look. There will be more of that in the future.
How will the travails of the auto industry affect the high-yield market? It will affect the overall indexes. But if you're concerned about high yield because you are concerned about the auto companies, you don't have to buy them. That said, I actually think the auto sector is nearing a point where it is going to be interesting. In a number of the bankruptcies that have already occurred -- Tower Automotive and Delphi are two prime examples -- the bonds actually rallied significantly since the companies have filed. That is telling you the market believes these companies are better dead than alive -- dead meaning better in Chapter 11, where you have some reasonable time frame during which they can be restructured.
That is what this auto crisis, if you will, is all about. It's about restructuring the cost basis of these companies. Outside of bankruptcy, there are a lot of impediments to that. If those impediments become insurmountable, the option is Chapter 11. Either in Chapter 11 or outside of it, it's clear these companies have got to restructure. At the end of the day, there's value there. It's just a question of at what price and when that value becomes obtainable.