One on One with Jonathan Lewis, Chairman of the Investment Committee at Samson Capital Advisors
Wednesday, January 16, 2008
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SUSIE GHARIB: A down day in the bond market. But investors are still looking at bonds as a safe harbor, in view of all the worries about a recession. We turn to a bond expert tonight for his analysis, Jonathan Lewis, chairman of the investment committee at Samson Capital Advisors. Hi, Jonathan.
JONATHAN LEWIS, CHAIRMAN OF INVESTMENT COMMITTEE, SAMSON CAPITAL ADVISORS: Hello. How are you?
GHARIB: So, tell us. The big question is how do bonds do in a recession?
LEWIS: Typically speaking when the Fed is still easing, bonds in fact can do reasonably well. The trick here at this moment in time for people who are worried about how to play the future is the bond market has in fact already discounted quite a lot of recession risk. Treasury yields have fallen quite sharply. So one of the real opportunities here for individuals is municipals. Municipals are extremely cheap right now. And municipal bonds, particularly in the three to seven-year part of the maturity structure are actually yielding more than Treasuries. And for municipal bonds to yield more than Treasuries is an extremely rare opportunity.
Suzanne: So let me ask you. There are so many bonds to choose from. So you're saying, OK, municipals are one option. What about Treasuries or corporates or high yield bonds? What's your recommendation there?
LEWIS: Well, for people who are worried about a recession and are worried about an uncertain environment, the lower you go down in the credit spectrum, the lower you go credit rating wise, the more risk you take on. And so for tax-paying clients worried about risk, paying taxes on corporate bonds or high yields may not make sense when you look at those yields after tax. That's where municipals are such a unique opportunity. In theory, they should yield less than Treasuries. Treasuries are taxable and municipals are not. But they're yielding 110 percent of Treasuries in some maturities which is very cheap. It's a win-win right now for individual investors.
GHARIB: There's a lot of talk or at least some talk now about stagflation, slow economic growth linked up with high inflation. If we do have a stagflation economic environment does that throw a monkey wrench into bond investing?
LEWIS: Stagflation throws a monkey wrench into all investing, unfortunately. A stagflation environment which we haven't seen in some time with slowing growth and rising inflation rates presents problems for stocks as well as bonds. The positive for bonds in a stagflation environment is they're likely to hold up better than other high risk asset classes. I get back to municipals because they're so cheaply valued now that if yields go down, they'll go down pretty far too but if yields on Treasuries start to go up, these bonds are so cheap they'll hold their value better. So that's one safe place to go.
GHARIB: What about these TIPS, those inflation protected Treasuries? Should investors pay more attention to TIPS?
LEWIS: Well, definitely because again in an environment that we've had where there's a lot of volatility and price movement you want to look at parts of the market that perhaps appear cheap on some bases. Regular Treasuries have had a flight-to-quality environment. They've gotten overpriced relative to where the Fed may move next. TIPS, while they've had a pretty big move too, are still discounting a very low level of inflation, about 2-2 1/2 percent. So if you as an individual believe inflation is going to be higher than 2 or 2 1/2 percent over the next couple years, TIPS can still offer some value. They are taxable. So of course you want to put those in some sort of a tax-sheltered vehicle.
GHARIB: You're also a portfolio manager. So here's a portfolio question for you. Is there a rule of thumb of what percentage of a portfolio should be in bonds in this kind of environment? Again this is for individual investors with a long-term horizon who are risk averse. Can you give us a quick guidance on that?
LEWIS: That's a question I get frequently. Unfortunately it's one of the toughest questions in the world because each person is very different. Their sense of risk is different, even the conservative client. The real way for someone to figure this out is how much can they stomach? How much pain and how much do they think the stock market will go down from here? If they think the stock market can go down a lot from here, well then they need to have a lot more in bonds. And then there's a mathematical equation that one can think through that says if the stock market is going to go down 20 percent from here, I could afford less and less in stocks if I want my overall portfolio to hold up.
GHARIB: All right. We'd love to hear more, but we got to leave it there. Jonathan thank you so much for coming on the program (ph).
LEWIS: Thank you for having me.
GHARIB: My guest tonight, Jonathan Lewis, chairman of the investment committee at Samson Capital Advisors.
