Gary Goodenough, Mackay Shields
Corporate, high-yield, junk bonds are Gary Goodenough’s favorite stomping ground. As the co-head of a range of bond funds at Mackay Shields in New York, Goodenough is a value investor to his core. ‘Typically I’m looking for a yield bias. And we’re always trying to assess supply and demand, making underweight and overweight judgments to outperform the market. Good credit analysis is a very important driver for us.’
With the big dive in international stock markets, bonds have made something of a comeback in recent times. Call it some overdue respect, perhaps. This second look is reflected in the figures: for almost all Goodenough’s bond funds, above average performance has been scored compared to their immediate peers.
Company leverage, funding needs, earning trends, competition… Goodenough – plus his senior credit analyst – will have a rash of questions come an investor relations interrogation. ‘We’d also want to know what growth strategies they might have. Sadly, bond investors are often seen as second-class citizens, but we want an honest presentation that flags all the issues.’
This is especially important, he says, given the beating stocks have taken. ‘Minimum spin and maximum facts,’ he repeats.
No surprise, then, that a simple, unfussy presentation goes down well.
Goodenough makes heavy use of the internet and likes to see plenty of company information up on the web in a timely fashion. The net has also brought other benefits, he says: ‘It allows us to have fewer people, and with the people we do have, we’re able to leverage them much better as a result. Years ago we had to go to an old library using fat old books. Today we can do it all in a heartbeat, electronically.’
Bloomberg, Moody’s and S&P are all relied upon for auxiliary material. Also, annual reports come in handy but quarterly filings and press releases are more useful. ‘You have to be immune to some of the annual report gloss, though as long as there’s plenty of actual information in annual reports, too, then we’re happy with that.’
While not essential, Goodenough thinks CSR and corporate governance credentials can be a worthwhile comfort blanket.
‘But it’s kind of tough to evaluate because it’s not a black and white construct, it’s a hazy assessment,’ he says. ‘We like companies with good governance as opposed to those without. We’re getting something extra, so we’ll take it.’
Market intangibles also can make a significant impact on an assessment, such as natural resources on the balance sheet, which may not reflect the full market value of assets. ‘Or a timber company,’ he says, ‘where the assets are understated because of accounting valuations.’
Extracting this sort of information is usually done through one-on-one meetings, judged more efficient than a group conference huddle. ‘Management might be more candid in a one-on-one,’ Goodenough suggests, ‘human nature being what it is. We’d rather a one-on-one for the nitty-gritty.’
No financial models take preference over others. However – and this is a constant Goodenough theme – a clean way of doing business is very attractive for his ‘buy button’. ‘We want to always try and encourage management to be strong from the top. We want the reputation of leaders to be a strong one – not tainted by scandal.’
Margaret Patel, Pioneer
What Margaret Patel most wants to hear about from a company – and preferably from the CEO as opposed to the CFO or the IRO – is vision. ‘I want to hear the strategic story on who and what they are – the over-the-horizon vision of the company. What do they think the industry trends are? How do they plan to take advantage of them, and what are their own dominant strengths? I also,’ she goes on, ‘want to know how well they reward themselves – how generously they treat themselves to stock and repricing options, for example.’
Patel’s vision strategy appears to be paying off: her $10.7 bn high yield bond fund – led by the telecommunications and healthcare sectors – gained almost 19 percent in the year up to June 2003.
Although Patel, based in Boston, usually has her own gut feelings about companies, she loves it when they’re directly affirmed or redefined by businesses themselves.
One-on-one meetings are good, supported by a decent overview of the company, though group sessions also allow her to pick up on other peoples’ concerns, too.
She probably relies less on the web and other IT-based support than other bond fund managers in this article, but she’s no Luddite. ‘I have so many research services send me reports via e-mail. And I use a Bloomberg terminal. To me, Bloomberg is like a filtered web. I get news and press releases through it as well as SEC filings.’
Annual reports are a handy tool, particularly for last minute year-end adjustments, though overly-glossy brochures are always a bit dismaying. ‘I’m often favorably impressed with companies that go the cheapy route,’ she says.
Corporate governance credentials don’t impress Patel either. And corporate social responsibility information usually verges on drivel, she says. ‘Those phrases, they’re so devoid of any real meaning. I suppose they are there to make it sound as if you’re doing the right thing. Corporates are there to make shareholders better off and to service debt, and not to dig too deep into the well for their own pockets. [CSR] is silly, stupid stuff.’
Intangibles that need to be nailed down include potential goodwill write-offs, she thinks. ‘The larger the intangibles, the bigger the risk.’
As to favored financial models, just keeping a close eye on the balance sheet is the tried-and-tested approach – ‘portraying a company’s performance from one period to another.’
Michael Gray, Deutsche Asset Management (US)
As credit and ratings research head, Michael Gray works across a spread of Deutsche’s fixed income funds from DeAM’s New York office, which covers up to $115 bn in fixed income assets.
‘In general, fixed income analysts are already looking at many of the same fundamental financial and strategic drivers as the equity investment community assesses – and require the same information and data. However,’ Gray goes on, ‘we also pay attention to a company’s cash flow dynamics. One of our most basic responsibilities is to assess a borrower’s ability to adequately service, and ultimately repay, its obligations.’
IRO contact is important for getting ‘a good look under the hood’, but unhindered access to all decision-makers – treasurers, CFOs and CEOs – is a must, especially when deep digging is needed.
Annual reports and web portals lend a hand to the research process, as do the 10Ks, shelf registrations, S4s and 13Ds.
‘We will look at any regulatory filings to glean necessary information,’ he points out. Corporate governance and corporate social responsibility also get a peek, according to Gray, but as he acknowledges, these are really ‘just two of numerous elements in the investment research process.’
Although a conventional head-to-head meeting with company individuals is usual, Gray also likes to talk to line management and those involved in facility line operations – in other words, both cooks and dishwashers.
Industry intangibles generally get worked into the fundamentals – ‘in the context of focusing on a company’s balance sheet strength, overall financial health and the ability to generate cash and service debt.’
Ron Speaker, Janus
Colorado-based Ron Speaker is a high-yield man. ‘That’s what investors in a fixed income fund really want,’ he says.
Identifying quality junk bonds, or bonds not expected to be classed as junk for long, is a key strand to his strategy. And his ‘fluff’ detector – when talking to an IRO – is always sharply tuned: ‘They should have a good understanding of how the analyst community views their business and be able to articulate the strategic direction of the company.’ A good handle on each of the company’s respective business units – and what drives them – is also fundamental to his $1.7 bn flexible income fund.
This approach has delivered a 12 percent rise in value in the last year, and 6.29 percent a year over the last five. And that’s without using much broker research: ‘We do all our own proprietary research, which we feel gives us an advantage.’ Drilling down a company contacts list – IRO, CFO, CEO – is a given; calls get put in to all.
Corporate governance issues get a proper squint, putting Speaker in a minority camp of bond managers along with Mackay Shields’ Goodenough: ‘The overall character and moral make up of a company is important,’ he says. Still, he swerves around tobacco bonds not because of a high moral ethical line but ‘because of the controversy and potential for legal issues.’
Annual reports are a necessary read and this bond manager pays strict attention to the 10K and S3s. He uses the usual financial models, looking at the balance sheet and cash flow, as well as a company’s ability to pay the bills. A large proportion of debt is not good; companies that get rid of it get respect.
Any intangibles also get linked to the moral rectitude of a business, says Speaker. ‘We do care about character of a company, what it stands for and how it treats its employees. Corporate attitude is important to us.’
One-on-one meetings are favored, however Speaker likes to keep an eye out for how management handle themselves en masse in a group session – doubtless with his fluff detector fully rigged.
Lea Ward, T Rowe Price
Most of Lea Ward’s contact with IROs is phone-based – when she’s able to track them down from her Baltimore base, that is. ‘Most IROs are extremely knowledgeable and can usually tell you what you want to know almost straightaway. However some can be difficult to reach because they’re so busy.’ Ward, T Rowe Price’s assistant vice president for bond research, cites here AOL Time Warner – a great IR team, she says, but also one that can be hard to connect with quickly.
When they are on the phone, most IR professionals are happy to trot through the financials statements – balance sheet, income statement and cash flow, she says: ‘I like as much granularity as possible. A breakdown of how the company defines cash flow, for example, is useful. The more granularity they can give me that relates to the financials, the better informed I am.’
Ward covered WorldCom two years ago and admits that was a tough tutorial (and a spur to better practice): ‘In the case of WorldCom, the financials indicated that the company could maintain liquidity, but the company’s stock and bond prices were under so much pressure that this should have been a signal to me that there was far more to the story than the facts suggested.’
Ward doesn’t automatically dial CSR into her analysis. ‘I’m interested in how a company is growing revenues, strengthening the balance sheet and maintaining liquidity. A company could be in pornography and it wouldn’t bother me.’
But whatever the company is doing, she listens very hard to what the management is saying before waiting to see if they deliver. She says Comcast in Philadelphia is a good example of management walking the talk. ‘They took on a major acquisition last year and took on more debt. They have done exceptionally well, bringing margins right up on the company they bought. If they say it, I believe it.’ However, if a firm is regularly over-optimistic, then she plants a semi-red flag next to its name.
Ward isn’t a regular user of technical flow predictor software: ‘I tend to just take the financials provided by the company and plug them into my own model.’
One-on-one meetings, which can be difficult to get, are definitely preferable to group sessions, she says, though group presentations by big companies can be useful.
However, IROs could help themselves – as well as analysts – by making themselves more accessible, she says. ‘Maybe they could host some smaller meetings just with the buy side, or sponsor meetings. Some investor days are hugely attended and often it’s tough to get a word in.’
