A lot of mutual fund managers begin their security-picking process by limiting the scope of their search. Greg Hopper does the opposite.
The manager of Julius Baer’s Global High Yield Fund doesn’t feel constrained by what he calls Wall Street’s definition of a junk bond fund, “which when you get down to it, is what Wall Street underwrites and puts in an index,” he says. Hopper takes as broad a view of high-yield as you are likely to find, buying busted convertible bonds, preferred stock, high-yield municipal bonds. He also is purposefully an anti-quantitative in his methodology.
“Most bond guys will come at you with these debt-to-EBIDA ratios, and EBIDA-to-interest-rates, and may even create a nice graph, with yield on one side and the EBIDA ratio on the other, and a nice little scatter.” Hopper scoffs, “It’s kind of interesting, but that’s not analysis.”
Since starting the now $45 million fund in December 2002, Hopper has consistently outperformed his competitors, topping his Morningstar category average by at least 140 basis points every year since inception.
“You can’t put this all into a computer.... Getting your ideas is a little bit of an art,” he argues. Likening himself to a stock picker, and junk bonds to the equity market, Hopper believes that upwards of 90% of junk bonds don’t reach maturity – they’re called, tendered, upgraded or the company goes bankrupt – so picking them like investment-grade bonds is pointless. What’s more, junk bonds respond to interest rates differently than good paper, instead acting more like stocks. Hopper treats them that way.
“I look at it more like an equity guy,” he says.
This means Hopper tends to worry about rising rates, which could “ultimately be jacked up so far that they crimp the ability of these companies to expand and to borrow.”
That’s troubling for a junk bond manager because the story for the last three years has been one of spread-tightening and opportunities drying up. “You end up having to look harder and in more esoteric places, perhaps,” he says.
Like
“Here was a government curve that had 500 bps of tightening in it,” he says. You just had to look further south than
Last year, the fireworks surrounding the
“If you look at Ford and GM, they’re suffering from very similar problems,” he says. “But GM is levered to those problems exponentially more than Ford is, and yet, Ford long bonds trade at about the same dollar price and about 130 bps less in yield.” He adds, “I think Ford is more than 130 bps better than GM.”
Hopper is fond of a medical metaphor for his specialty. “The high-yield market is really all about this process of companies and industries going through the sick house and coming out the other side better.” Some might be “overnight patients,” their condition, and credit rating, upgraded. Some, of course, might not be so lucky.
“They still come out the other side at some point in better shape,” he says. “That’s what the auto industry is all about right now.”
Indeed, investors like Hopper might find chapter 11 preferable for some auto names. Two of the bigger recent bankruptcies in the sector, parts makers
It’s all a matter of definition.
of a junk bond fund, “which when you get down to it, is what Wall Street underwrites and puts in an index,” he says. Hopper takes as broad a view of high-yield as you are likely to find, buying busted convertible bonds, preferred stock, high-yield municipal bonds. He also is purposefully an anti-quantitative in his methodology.
“Most bond guys will come at you with these debt-to-EBIDA ratios, and EBIDA-to-interest-rates, and may even create a nice graph, with yield on one side and the EBIDA ratio on the other, and a nice little scatter.” Hopper scoffs, “It’s kind of interesting, but that’s not analysis.”
Since starting the now $45 million fund in December 2002, Hopper has consistently outperformed his competitors, topping his Morningstar category average by at least 140 basis points every year since inception.
“You can’t put this all into a computer.... Getting your ideas is a little bit of an art,” he argues. Likening himself to a stock picker, and junk bonds to the equity market, Hopper believes that upwards of 90% of junk bonds don’t reach maturity – they’re called, tendered, upgraded or the company goes bankrupt – so picking them like investment-grade bonds is pointless. What’s more, junk bonds respond to interest rates differently than good paper, instead acting more like stocks. Hopper treats them that way.
“I look at it more like an equity guy,” he says.
This means Hopper tends to worry about rising rates, which could “ultimately be jacked up so far that they crimp the ability of these companies to expand and to borrow.”
That’s troubling for a junk bond manager because the story for the last three years has been one of spread-tightening and opportunities drying up. “You end up having to look harder and in more esoteric places, perhaps,” he says.
Like Colombia, perhaps. At the end of last year, bonds issued by the South American country were the single largest position in the fund, which bought it at 12%. Hopper has since sold the entire position, at 7.5%, with some currency appreciation to boot. (Hopper’s fund doesn’t shy away from buying in local currencies.)
“Here was a government curve that had 500 bps of tightening in it,” he says. You just had to look further south than San Diego.
Last year, the fireworks surrounding the U.S. auto industry – the credit downgrades of Ford Motor Co. and General Motors, and the bankruptcy of GM-linked auto parts manufacturer Delphi – were the big story in junk bonds.
“If you look at Ford and GM, they’re suffering from very similar problems,” he says. “But GM is levered to those problems exponentially more than Ford is, and yet, Ford long bonds trade at about the same dollar price and about 130 bps less in yield.” He adds, “I think Ford is more than 130 bps better than GM.”
Hopper is fond of a medical metaphor for his specialty. “The high-yield market is really all about this process of companies and industries going through the sick house and coming out the other side better.” Some might be “overnight patients,” their condition, and credit rating, upgraded. Some, of course, might not be so lucky.
“They still come out the other side at some point in better shape,” he says. “That’s what the auto industry is all about right now.”
Indeed, investors like Hopper might find chapter 11 preferable for some auto names. Two of the bigger recent bankruptcies in the sector, parts makers Delphi and Tower Automotive, actually appreciated after filing. According to Hopper, the market is saying, “The patients are better dead than alive.”
It’s all a matter of definition.