Bruce Monrad Finds Riches in Junk

Bruce and Ernest Monrad are the best-known multigenerational team to deal in junk since Sanford & Son.

The father-and-son team manage the highly regarded high-yield bond fund (NTHEX Quote)Northeast Investors. But unlike Fred and Lamont Sanford, this Harvard-schooled duo shares a most rewarding family business.

"It's a joy to come in and talk over credit offerings with my father -- we have a lot of fun," says Bruce Monrad, subject of this week's 10 Questions. "We don't agree 100% of the time, but we're on the same page a lot."

That like-minded thinking included an aversion to the debt of telecommunications companies, which has been a boon for the fund. Northeast Investors returned 3.23% in 2002, good enough to rank in the top quarter of all junk bond funds, according to Morningstar.

But don't go mistaking this $1.7 billion fund for a staid little family business. The Monrads -- who have a combined 55 years of experience running the fund -- aren't afraid to take on risk, provided they think the rewards will be ample. Though the fund took a few lumps in the late-1990s, its long-term record speaks for itself: A 10-year average annual return of 7.11% ranks in the top 4% among its peers, according to Morningstar.

In this week's interview, Bruce Monrad shares his outlook for junk, what he thinks about telecom debt now, and whether bond offerings ranging from Ford to Trump are piquing his curiosity.

Bruce Monrad Northeast Investors Trust

Tenure: Co-manager since January 1, 1993

Assets: $1.66 billion

10-Year Average Annual Return: 7.11% (Top 4% of Peers)*

Top Three Holdings: U.S. Treasury Bill (20.19% of fund); Trump Atlantic City (4.08%); Southern California Edison (3.44%)

Fund Information: Web site or 800-225-6704

*Performance through 2/7/2003. Source: Morningstar, Northeast Investors

1. What's your outlook for the market and the economy?

The economy is moving forward. There might be a shock to the system from the war. But our economic model would be the last war, in 1991. We think things will get ironed out very quickly. High yield in 1991 did nothing but go up after the first bombs were dropped.

Regarding the asset class, we really like it on a relative basis. We think it's OK on an absolute basis. It's being priced off of 1% Treasuries and 4% Treasuries. What concerns us is what happens when interest rates go up eventually. That gives us pause.

About one-quarter of the market trades north of 105 cents on the dollar. That worries us a bit. Although, those are obviously the safest securities from a credit standpoint.

2. How are you invested to take advantage of this economic outlook?

We've got a typically eclectic mix. We're sitting on more cash than we would've liked at this time -- cash is running at about 15%, which is high for us. It isn't entirely a reflection of pessimism toward the market. Rather, it's caution about adding to either side of the investing barbell: the bonds trading at very low yields or at the other end of the spectrum, adding to the really high-octane parts of the market, which is probably where the best returns are, but it comes with a lot of volatility.

We haven't really changed our sector weightings that much. In the past 12 months we have added to the "fallen angel" electric utility sector, which was a 0% weighting. Now we have a couple big positions there.