"Market Monitor"-Eric Takaha, Portfolio Manager at Franklin Templeton
Friday, February 20, 2009PAUL KANGAS: My "Market Monitor" guest this week is Eric Takaha, portfolio manager and director of the credit group at Franklin Templeton. Eric welcome to the program.
ERIC TAKAHA, PORTFOLIO MGR. & DIR. CREDIT GROUP, FRANKLIN TEMPLETON: Thanks, Paul.
KANGAS: This is your first visit with us, so share with our viewers your investing philosophy if you would, briefly?
TAKAHA: Sure, I focus on the corporate bond market primarily and so we're very much a bottom-up driven shop. We look at the fundamentals of the corporate issuers. We think about the long-term prospects really from a credit standpoint in terms of the outlook for these companies. And we look at the relative value of the securities that we're investing in, but we're very much focused on individual security selection and we have a very long timeframe in terms of our investment. That's really been our philosophy since I joined the firm about 20 years ago in the late 1980s.
KANGAS: With the stock market in such sad shape, it makes the bond market look a little better, does it not?
TAKAHA: You know, it has and frankly 2008 was a good example of the benefits of diversification into bonds, at least for part of a portfolio. If you look at the performance of the stock market versus the broad bond market, certainly having some bonds in your portfolio gave you diversification, helped to dampen some of the downside that you saw in the stock market. And frankly as we sit today and look at the bond market, we see a lot of opportunities for pretty attractive investments and yields in the bond market globally.
KANGAS: What are the chances of appreciation of bonds with interest rates already practically zero in the Fed funds rate, for example?
TAKAHA: The good news is, if you look at interest rates as you mentioned they're close to zero on the short side. Even Treasury bonds are at historical lows. However, if you move outside of the government bond market, you look at the investment grade market, you look at some of the mortgage markets, the asset-backed market, certainly the high yield market, many of those prices are actually at a discount to par. So in addition to getting yields above government yields, you actually have some price appreciation potential when you look at some of these areas.
KANGAS: What are your favorite segments of the bond market -- Treasuries, munis, corporates? Where do you find the best deals?
TAKAHA: Right now not Treasuries, actually investment-grade corporates is one of the areas that we've been putting a fair amount of money to work over the past several months. The yields for investment-grade corporates is around 7 percent which obviously compares fairly attractively to Treasuries. And although we think the fundamentals are going to be pretty difficult for the next few quarters given the economy and given the outlook for earnings we think many of these investment in corporates will weather the storm and you're picking up a pretty nice relative yield and some price appreciation potential by investing in investment-grade corporates.
KANGAS: What quality ratings would be the lowest that you would go on the purchase of a bond?
TAKAHA: Well, for investment-grade corporates, the lowest is triple B. It ranges everywhere from triple B to all the way to triple A. We have dipped in to non-investment grade, so those would be rated double B and below in the scale. And there's even some distress names that we've looked at from an individual basis. Although you have to understand that if you're investing in non-investment grade, there will be more volatility. There's more price risk. In some ways, high yield bonds are almost more equity like than they are bond like. So you have to understand the risks, but at the same time the upside in terms of appreciation is much greater than the typical bond. So we have some non-investment grade portfolios as well, but we have focused on investment grade as of the current cycle.
KANGAS: What about maturity lengths? Is there a minimum or maximum there?
TAKAHA: We really don't have any minimums or maximums in terms of maturity. Certainly if you do have a longer maturity bond, you have to understand that interest rates are relatively low, so if you look out several years and there's some chance of longer term inflation which we don't see today, but longer term, there could be some pressure on some of the prices for longer maturity bonds. But in general we play across the spectrum anywhere from short term maturities all the way to very long 20, 30 year maturity bonds.
KANGAS: You're the manager, portfolio manager of a fund that has a lot of diversification. What is the name of that fund?
TAKAHA: That fund is the Franklin Strategic Income Fund. It is a very broad, multi-sector global fixed income fund.
KANGAS: What's the trading symbol just out of curiosity? FRSTX.
TAKAHA: That's right, FRSTX.
KANGAS: OK, very good, interesting things that you told us, Eric and I want to thank you very much for being with us.
TAKAHA: Thanks again for having me. It's my pleasure.
KANGAS: My guest, Eric Takaha, portfolio manager and director of the credit group at Franklin Templeton.
