By John Sullivan
Predictions of mass default , European sovereign debt, outlooks from Bill Gross, Bernanke's shenanigans- anyone still think fixed income isn't "sexy?"
It's dominated headlines since the crisis began and for good reason; when done right, there is alpha to be had, despite current conventional wisdom about the availability of yield. Gannett Welsh & Kotler is one of those firms doing it right.
"We have a top-down/bottom-up approach," says Nancy Angell, GW&K's senior vice president who co-directs the firm's fixed income investments along with John Fox. "In rising interest rate environments, we extend out a bit longer. In declining rate environments, we'll shorten our maturities and take more of a defensive position. We're total return focused, and our alpha comes from our positioning on the yield curve."
The firm, founded in 1974, is run by CEO and CIO Harold Kotler, a Babson College alum who joined the firm a year later. Angell has been with the firm for 27 years, Fox for almost 22, and four of their five traders have 10 years under their belts.
"The muni space is dominated by the retail market," Fox adds. "Retail investors think risk comes from longer durations, but the primary concern is actually reinvestment risk, when you're forced to reinvest maturing bonds at lower and lower rates, destroying the earning power of capital."
The firm's competitors, Fox says, buy into client fear about longer-term duration and allow them to purchase shorterterm paper, which increases reinvestment risk.
"Our job as managers is to protect principal and income," Angell says. "We've had two years of negative performance in 30 years, and in those two years it was barely negative."
So how do they take advantage of days of record issuance, like those seen in early March?
"That was a technical blip," Fox says. "It created opportunity and was a great time to be buying. There was a nice slate of new issues for us to choose from." What kind of headaches did Meredith Whitney's famous non-prediction cause for the team?
"It was a headache, but it gave us an opportunity to explain the story of this dire prediction to our clients," Angell says.
"It was a high-profile example of a mistake so many others make," Fox adds. "They confuse 'distressed' with 'default,' which are two totally different things. It was nice for us because it all panned out the way we said it would, which built our credibility with clients."