You might not know Sandy Rufenacht's name, but he's a solid example of the New Economy's reversal of fortune.
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bubble inflated, Janus' tech-heavy growth funds took off, drawing oceans of ink and money. All the while, Rufenacht was quietly beating his average peer each year since the
Janus High Yield fund was launched in 1996.
While many high-yield funds are in the red over the past three years, he has mostly steered clear of bombshells such as the telecom sector and Enron (ENE) -- blowups that hurt many of his stock-picking colleagues at Janus. Last week we heard from a gaggle of Janus stock fund managers. Now here's how the firm's style looks through the lens of a bond investor who has beaten them all over the past year.
Where is he investing today? Is there value in telecom now? When does he think the economy will pick up? Read on.
1. What's the case for investing in high-yield bonds today?
I think high yield is very attractive for a couple of reasons. One, we're in a very low interest rate environment, not only here in America but in the world. Two, you have a stock market that has been extremely volatile, and the jury is out as to whether stocks are overvalued or appropriately valued. To say that it's appropriately valued, you'd have to expect an extreme, V-shaped economic recovery.
High yield isn't for everybody, but if you're confused as an investor, meaning interest rates are too low and you can't hack 2% and 3% interest rates, and yet the volatility of the stock market turns your stomach, then maybe high yield is a category that you should look at.
2. Where are you investing today?
Earlier in the year we made a play on the homebuilders because we thought either lower interest rates would keep the home sales going strong or that a recovering economy wouldn't raise rates too much for homebuyers. When it finally looked like maybe the economy was going to stall for longer than we'd anticipated, we took some chips off the table. Right now we have about a 5% weighting when we were closer to 8.5% earlier.
Assets: $407.5 million
1-Year Return: 7.2%/Beats 67% of Peers
5-Year Return: 6%/Beats 95% of Peers
Sales Charge: None
Expense Ratio: 1.03% vs. 1.28% category avg.
Top Sectors:Cable TV
Sources: Morningstar. Returns through Dec. 3.
Energy is also a new focus for us. Historically, we thought their capital expenditures were so great that you never see them delever
pay off their debt. But many hedged their gas production at much higher levels, so they actually started deleveraging. Also, health care seems to have finally recovered. It seems that the Bush administration is a little more health care friendly. It has been a very good area, and we were into it early.
We've put some emphasis on the wireless market, companies like
, which was just bought by
. We own
. We just feel these companies have solid cash flows, and their subscriber rates are going up. They're not necessarily deleveraging, but they are some of the safer areas in telecommunications.
And of course the portfolio has been built around gaming since its inception. The weakest of the weak have fallen by the wayside and you're left with some very worthy participants --
-- with great asset coverage and leverage that's tolerable. At the end of the day you have an asset, whether it's a license or a location. And more importantly, they're cash-flow machines.
3. What led to the high-yield market's volatility over the past three years?
Well, a high-yield bond is essentially a stock with a coupon. The volatility was led by a choppy stock market. Now secondarily, over the past five years the high-yield market financed a huge amount of telecommunications companies that didn't have good business models. Eventually the debt reared its ugly head, and that was the end of some of these companies, like
Source: Morningstar. Returns through Dec. 3.
4. We've all heard a lot about Janus' grass-roots research. How do you evaluate a casino?
Recently I literally sat in Las Vegas casinos for seven days. It just about kills me to be there longer than three nights. I suck in so much cigarette smoke and hear the
slot machines' ding-ding-ding so many times that it drives me nuts.
But I wanted to see an entire cycle. I wanted to see what Monday through Wednesday looked like. I wanted to see what Wednesday through Friday looked like, and I wanted to see what the weekend looked like. I also wanted to go into the Las Vegas community and see what car prices were doing, what home prices were doing. I came to the conclusion that the city is not doing as well as the bonds have recovered, and that's why we're selling some bonds. I've been covering gaming bonds for about 11 years, so it's an area I know pretty well.
5. We've seen value managers like Bill Miller sniffing around telecom companies but buying the bonds in some cases, since they'll offer appreciation and a lot of income if these companies get back on their feet. You mostly stayed out of telecom -- is there value there now?
I think you buy the bonds, not the equity. I grew up under
former Janus chief investment officer Jim Craig, and he said, "If it's unanalyzable, it's not to be bought." I think there probably is value in telecom, but it's unanalyzable because we don't focus on bankruptcy breakups. It's not our type of analysis. So I assume that there is value, but I can't analyze it.
I can go to a casino in Las Vegas or Blackhawk, Colo., and analyze it. I can analyze it in five minutes based on the side of the highway it's on, whether there's a stop light, how many cars are in the parking lot, why people like to come, what the buffet is like, who manages the casino and how much equity they own. I can analyze all that, but I can't analyze these telecommunications companies.
6. Do you think some of your colleagues wish they took your advice on the telecom area?
In most cases they did take our advice, and we took their advice in most cases as well. At the end of the day, we have different mandates. I said I wanted to be a little bit more conservative, and these aggressive growth funds were aggressive.
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7. When do you see the economy improving?
The best-case scenario is that you come through a stronger Christmas than Wall Street expects. My sense is that it's not going to happen. At the same time, you're seeing a lot of homes move off the market due to lower prices and lower interest rates. That tells me that America's America: Show Americans a good enough deal, they'll take advantage of it.
The problem for Wall Street is that there's no profit in a lot of these deals. So you have to wait until the middle of next year for some recovery. And recovery doesn't mean we have to go back to 6%, 7% or 8% GDP growth. If we could get back to 2.5% or 3% we'd all be happy. My concern is that the equity markets think that we possibly have to get back to where we were.
Yeah. I don't know if that's in the cards.
8. Did you own any Enron bonds, and was there a way to see this horrible situation coming?
I don't know that I ever could have seen it coming because it wasn't in my market long enough. I never owned it and I never even looked at it. I've just found that these
troubled companies are unanalyzable. I've also found that as an analyst, companies in crisis-management mode don't want to talk to bondholders or stockholders. That doesn't sit well with me. Falling angels fall fast, whether it's
, Enron or
. The risk/reward parameters relative to the amount of time that I'm going to devote to the research don't stack up for me.
The market overall misjudged the amount of debt that Enron had, and that's something as a bondholder that we're always cognizant of. We'd also look at its asset base. If you do default, what is it that I have claim to? And in this case, it doesn't look like much after the banks are all paid out.
9. What's your outlook for interest rates?
I think interest rates had been higher than they needed to be over the last five years, and I feel the
was a little too aggressive on the rate hikes. Whether they want to say it that way or not, they felt that the stock market needed to be tamed.
We're operating under the assumption that even if the economy recovers, interest rates won't rise dramatically. If rates do rise, we don't want to be in interest rate-sensitive securities. So we're trying to find bonds that have a better rating, so if we have another terrorist attack they're going to react better than a busted-up telecom company. But on the other hand, if it gets going, that we participate to some degree.
10. What's the last company you came across that seems grossly underappreciated by investors?
One is the Hard Rock Hotel & Casino in Las Vegas. It's owned by the founder of the Hard Rock Cafe, Peter Morton. If you look at the weekend after the Sept. 11 timeframe, this place barely missed a beat. And the following weekend, it didn't miss a beat at all. And the following Thursday, it had a record Thursday.
And more importantly, it's owned by Peter Morton, and Peter Morton's paid off $48 million in bank debt in the last two years. It's a manageable property with 600 rooms, not one of these 6,000-room megaresorts. It doesn't have to rely on conventions, but a young crowd out of California. In that seven-day period, it was easily the busiest casino each of the seven nights. Yet the bonds are trading at a nice yield and are just overlooked. They're trading around 92 right now, but I think they're probably worth 102.
Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
email@example.com, but he cannot give specific financial advice.