Value and Global Reach Make Sense for Fixed Income
Pioneer Strategic Income Fund
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|
From our perspective, a lot of the semiconductor companies, in our view, have bottomed out. They have gotten their costs in line relative to new sales and, frankly, as bondholders, all we need them to do is pay their debts and generate some cash flow. A lot of these companies have shrunk themselves down to the point where they're generating lots of free cash flow and are living for another day. We think that in the case of International Rectifier and General Semiconductor, they have certain characteristics that we like, products or markets where they're adding value for their clients and they've been able to do pretty well. In those two in particular, we own some busted convertible bonds.
Q: The thing about a multisector bond manager is he goes everywhere in the debt markets.
Once we find a company we like and the industry we like, we'll look at the bond structure and decide which bonds, whether it's straight bonds or busted convertibles that make the most sense to us. In the technology industry, a lot of them do not issue straight debt. We take advantage of making investments in those companies where the stock prices are down quite a bit. These busted convertibles have very attractive yields to them compared to straight debt.
Q: Since you don't trade much, it tells me you're patient about getting your price.
We're always looking for certain credits to own in the portfolio and if it meets our price, we'll acquire it if we have the cash. We don't stretch for yield. We don't pay the highest distribution. We pay a competitive rate of income, but we're focused on people's capital and preserving it. We're one of the few funds in the category that has an NAV over its initial price, too.
Q: How about default rates? If you want to learn how the economy is doing, don't go to an economist, go to a bond fund manager and ask him about the default rate.
Frankly, we're pretty optimistic about the economy because default rates have been coming down and spreads have been narrowing as though economic activity is getting better and stronger in the future. Based on what I've seen, default rates peaked early last year. Default rates peaked 15 months ago. They've been working their way down and we think they're going to continue to come down. We've had many rate cuts from the Fed, but only up until the fall of last year, October really, have corporate bond yields collapsed relative to treasuries. That is going to have and is having a very positive impact on companies. They're able to access the credit markets much easier today than they were six or 12 months ago and frankly at much lower yields. It is a real monetary ease for corporations, a big tax cut, essentially. I think it's going to start working its magic over the next couple of quarters.
Q: Does Pioneer have an outlook on U.S. GDP growth?
Generally, most of the managers feel as though the economy is in the process of bottoming and bouncing along, but there are probably enough leading indicators and good things that are coming to pick up economic activity next year, and, frankly, towards the end of this year, too. As I mentioned, what's gone on in the corporate markets is going to be a big help to companies. It will permit projects to go forward that weren't profitable six to 12 months ago. They will be able refinance debt at much lower levels. It's going to reduce their costs and increase their earnings.
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