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Value and Global Reach Make Sense for Fixed Income
Pioneer Strategic Income Fund
Interview with: Kenneth J. Taubes

Author: Dave Jennings
Last Update: , :
We are a value shop. We do a lot of bottom up credit work and even most of our portfolio structuring is very strategic in nature. We don't change our portfolio thinking every month. We think economic cycles are fairly long lived.

Pioneer Strategic Income Fund

Q: Even though I understand this is a multisector bond fund, based on a review of the latest report of principle holdings, why are you invested in all these foreign credits?

A: We have what I would consider two kinds of bond holdings. One is high-quality, government agency debt of G7 type countries that are held as non-dollar investments in their home, or local currencies. For example, we own French TIPS.

Q: Are they comparable to the U.S. treasury inflation protected securities?

A: They don't call them French TIPS, but I do. They're comparable bonds. They adjust the principle for inflation. They are euro-denominated securities. We also own, for example, Danish mortgages, but they're held in Danish kroner. We own Swedish government bonds, which are denominated in Swedish kroner. Those are the principal high-quality securities we own. I would say our overall non-dollar exposure is about 18.5% of the fund.

Q: Is that by charter or strategy of philosophy?

A: A little bit of philosophy and strategy, principally, at the moment. We don't have to hold any non-dollar bonds in the portfolio. We're not required to. But, as a multisector fund, we do like to keep diversified. We do think that is one of our principal strategies in this fund. That means in my mind international securities, although we will adjust the asset allocation.

Q: What is the second type of bond holding?

A: The other types of international bond we will hold in the portfolio are of low quality, that is, not investment grade. We think they are good investments, but they are not investment grade. It is not the largest allocation. We have about 13% of the fund in this type. And, we don't own any emerging currency denominated bonds. We've never owned that sort of non-dollar investment in this portfolio. If we have made investments, and we have over time, in Brazil, Chile or Peru, which is a country we own right now, those are all dollar denominated securities.

Q: Your global approach provides a clue as to how the research department is able to go around the world to find these attractive situations.

A: That's right. I'm based in Boston. We're part of Pioneer Global Asset Management, which runs over $100 billion worldwide. We have principle investment operations in Boston, Dublin, Singapore and Milan. We cover, really, all the major investment continents from those four principle locations. We have bond managers and analysts covering companies in Europe and Asia as well. We do have global reach from an investment perspective.

Q: Since bonds are quoted. How do you work the bidding for these overseas securities?

A: We have broker/dealers that we work with throughout the world. We can trade most bonds in U.S. hours. If not, we will come in early in the morning to trade in European hours. Also, if we want to trade in Asia, we'll stay late to accomplish that. In the currencies, you can trade in the U.S. fairly easily all day long, regardless of what currency you're trading. Frequently, you can trade the bonds, too, of a lot of these countries. But the best pricing for a German government bond is going to be when the German market is open. We have people here that can trade in all those currencies or bond markets around the world.

Q: Compared not only to bond funds, but any type of equity security fund, any time I see turnover below 50% it tells me the manager or management team tend to stick with positions.

A: That's true. We consider ourselves investors, not traders. I believe for our fiscal year of 2002, it was around 34%, which is quite low. In fact, in similar funds, I think you'll see over 100% turnover. From my perspective, that's bad for a lot of reasons. One, it chews up a lot of trading costs. Two, and most importantly, is our approach. We are a value shop. We do a lot of bottom up credit work and even most of our portfolio structuring is very strategic in nature. We don't change our portfolio thinking every month. We think economic cycles are fairly long lived. We'll live with a position, whether it's interest rate risk, or yield curve positioning or asset allocation, for more than a year. If we have a credit, we'll own it for a couple of years. We don't just get rid of credits based on a price target.

Q: Since inception goes back to April 1999, the chart for the fund hasn't looked back. It's at an incline with little fluctuation. $10,000 is now $13,000 after three years of bear market.

A: We're grateful that we have been able to deliver good results for our clients. The fund, including all share classes, was about $225 million. We are seeing net subscriptions, and we have been since the day we started this fund. Just like stocks, I think it's important to be well diversified in the bond market.

Q: You still have to protect capital as part of the investment strategy.

A: But there are other types of risks and opportunities. One is credit risk. The second is currency risk. We try to blend those sorts of opportunities into this portfolio so that you have a balanced fixed-income portfolio. It allows us to do things that other funds can't, for example, take advantage of what we perceived to be a weak dollar environment. Also, the rebound in the corporate bond market, which we've taken quite a bit of advantage of over the last year.

Q: I can see that in the holdings in corporates.

A: We have a strong corporate process here. We run one of the largest high-yield funds in the country. Not only the largest, but probably also the best over the last five years. You get the same sort of credit process in this fund as you do in our high-yield process and our other corporate bond funds. I think that just adds to the opportunities for investors.

Q: In reviewing the overall credit rate for the corporate holdings, it's quite good from the high-yield perspective.

A: First off, on average, the portfolio's credit rating is triple B minus, which places it at the low end of investment grade. It's our strategy to keep this fund as an investment grade bond fund. We don't run it as a high-yield fund. As of recently, it's been about 22% in double Bs, and 24% in single Bs, and less than 1% in triple Cs. We own about 17% in double Bs, 4% in single As and double As, and 26% in triple As in government bonds or government agencies.

Q: When you invest in foreign corporate bonds what do you look for to see that the company will make good on its debt?

A: It's important to us to be in sectors that are showing reasonable growth, even if we can find sectors that are growing faster than the overall economy. That is one of our principle objectives. When you buy corporates, particularly in the high-yield area, even the best companies can't escape who they are. And if the industry is shrinking, it's very difficult, as a levered entity, to get ahead of the debt payments. We like to have the wind at our back, and the way to do that is to find industries that are growing. We have been able to find industries that are growing in a bear market, like oil and gas, like healthcare, for example. If we find those sectors, we use our top down research to identify sectors that are attractive to us. Within those sectors, we will do rigorous bottom up research, where we will look for certain characteristics of companies, typically market leaders, number one or number two in their field. We look at six or seven different factors that make them one of the better credits in the industry.

Q: I just noticed in the top holdings a couple of semiconductor companies. They don't make the high-end products. Why do you own them?

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Sources: Data collected by 123jump.com and Ticker.com from company press releases, filings and corporate websites. Market data: BATS Exchange. Inc