"Market Monitor"-Eric Takaha, Portfolio Manager of the Franklin Strategic Income Fund
Friday, October 02, 2009PAUL KANGAS: My guest "Market Monitor" this week is Eric Takaha, portfolio manager of the Franklin Strategic Income Fund and welcome back to NIGHTLY BUSINESS REPORT, Eric.
ERIC TAKAHA, PORTFOLIO MGR., FRANKLIN STRATEGIC INCOME FUND: Thanks for having me again.
KANGAS: On your last visit with us in February, the bond markets which are your specialty, were doing very well, while stocks as we know, were in terrible shape. Has the sharp rebound in stocks since then undermined bond prices and taken buyers elsewhere?
TAKAHA: It really hasn't. Overall, as you know, short-term interest rates remain very low because of the Federal Reserve's policy and so people have been reaching for yield. And so if you look across the fixed income markets, whether it's high-yield corporates, investment-grade securities, emerging market bonds, they've all had a very strong run this year. In fact some of those markets, such as high-yield bonds are up over the 45 percent this whole return on a year to date basis. So it's been a very good run, even with equities moving higher over the past several months.
KANGAS: Well, the Fed of course, has said it wants to keep interest rates low for some time to come or at least until the recovery gains traction and then raise rates with alacrity it said, with speed or aggressively. How do you as a bond fund manager prepare for a strategy for that scenario?
TAKAHA: The good news is even though the Fed has to come out with that statement to make sure that they are very vigilant with inflation in general, the overall economy still has a lot of slack. Unemployment, as you know is very high. Capacity utilization is very low and so we don't see a lot of inflationary pressures over the near term. When it does occur, fortunately for a fund that we run like Strategic Income, we have a lot of other areas to invest in, so we're not just investing in government bonds. We're investing in non-U.S. securities. We're investing in some of the corporate sectors which offer yield above Treasury securities. So even if you do see a rise in rates over the next several years, we have places to invest in where we think we can still add some value even in that type of scenario with interest rates moving higher.
KANGAS: Do you deal much in convertible bonds?
TAKAHA: We have a little bit of exposure to convertibles, but frankly the focus of our portfolio is really traditional fixed income securities so from time to time, we'll invest in (INAUDIBLE) convertibles but that's not a main thrust of the portfolio.
KANGAS: Of the three types of bonds, corporate, tax-free and government, what percentages do they make up in your fund?
TAKAHA: Right now, corporate is the majority of the portfolio. Over half of the fund is in corporate tax securities, whether it's high-yield, investment grade or bank loans. We have a pretty small percentage in tax- free securities since this is a taxable, fixed income fund. And then in general government bonds represent the remainder, although many of those government bonds are outside the U.S. They're not just U.S. government securities but also from many other foreign countries.
KANGAS: So a lot of diversification there.
TAKAHA: That's right. It's really a multi-sector fund that's trying to provide a lot of exposure across the globe to fixed income securities.
KANGAS: Let's have a look at a one-year chart of your Strategic Income Fund and as we can see, it's done very well, especially since February. Give us some statistics on it.
TAKAHA: Certainly. The total return including dividends, since that period of time is up about 20 percentage points. The yield, although it does float on a monthly basis, provides about a 4-4 1/2 percent yield to investors on (INAUDIBLE) shares before any of the load factors. Again it is a fund that's benefited from the significant rally we've seen, particularly in the corporate sector and that's really what's driven the performance over the past several months.
KANGAS: It's certainly doing well and I expect that it will continue that way. Let's hope so. Do you personally own shares in the fund or have other disclosures to make about it?
TAKAHA: I do own shares in this fund.
KANGAS: Very good, indeed. I'm afraid time has run out for us. But I want to thank you for being with us once again and sharing your thoughts.
TAKAHA: Thanks again, I appreciate it.
KANGAS: My guest, Eric Takaha of the Franklin Strategic Income Fund.
