institutional investor

institutional investor

High-yield bonds have given stocks a run for investors' money this year, and a tepid U.S. economic recovery could keep institutional money flowing to that corner of the credit market, some market watchers say. Even with the Merrill Lynch U.S. High Yield Master II index surging 48.5% this year through Sept. 30, investors have continued to allocate money to high-yield bonds. For example, on Aug. 7, the board of the $12.6 billion Kentucky Teachers' Retirement System, Frankfort, hired Cincinnati-based Fort Washington Investment Advisors Inc. to manage a $200 million high-yield bond mandate, its first allocation to that market segment, according to a spokesman for the system According to institutional sales executives, who declined to be named, other pension funds looking now to award U.S. high-yield bond mandates of $100 million or more include the $3 billion Kern County Employees' Retirement Association, Bakersfield, Calif.; $23 billion Northrop Grumman Corp. pension plan, Los Angeles; and Munich-based BMW pension plan. Investors under pressure to add risk in the face of continued economic uncertainty can still turn to high-yield bonds for “competitive returns with better downside protection” than equities, said Thomas P. O'Reilly, a managing director with Neuberger Berman LLC, New York, and a portfolio manager of the firm's $6.5 billion high-yield bond strategy

The definition of “competitive” might be in flux following the Standard & Poor's 500 stock index's eye-popping 59% surge from early March, which turned January and February's sharp sell-off into a gain of roughly 20% for the first three quarters of the year. The flow of money into high-yield bonds began picking up late last year after market turmoil swelled their spreads over Treasuries from a historic average of roughly 400 basis points to more than 1,800 basis points, promising windfall capital gains for investors bold enough to put money in at that moment. According to public fund institutional investor data tracked by Louisville, Ky.-based Eager, Davis & Holmes LLC, 15 high-yield bond mandates were awarded in the final quarter of 2008, just one shy of the combined total for the three prior quarters. The first and second quarters of 2009, meanwhile, saw 12 and nine mandates awarded, respectively, with combined assets placed for the three quarters ended June 30 coming to just less than $2.4 billion.

It was a “once-in-a-lifetime opportunity to buy credit” for firms such as Pacific Investment Management Co. LLC, that believe in swimming against the tide, said Mark R. Kiesel, a managing director and global head of the corporate bond portfolio management group at PIMCO in Newport Beach, Calif. Late last year, PIMCO officials were “pounding the table,” calling on clients to look at high yield, he said. Data from Marietta, Ga.-based performance tracker eVestmentAlliance LLC suggest some clients were listening: PIMCO's high-yield strategy pulled in more than $1 billion of net inflows in the first half of 2009. Ted L. Disabato, managing member of Chicago-based investment consultant Disabato Advisers LLC, said high-yield bonds figured prominently in a two-step deviation from the “rule book” his firm pursued to keep clients from getting “run over by a truck” — one of only two suchmoments in his 25-year career. By mid-2008, he said, a number of his clients had halved equity weightings that had come to roughly 60% of their portfolios, putting the balance in Treasury bonds. Then in February, with top economic policymakers clearly signaling their intention to do “whatever it takes” to support the financial system, that Treasury bond allocation was shifted to high-yield bonds.