Just because I am choosing here to write about investments and money management, do not think that I have any special insight or knowledge of particular markets. Like many in business, however, I do spend a fair share of my time in the company of investment managers. I also visit companies, read annual reports, attend meetings, and meet with senior managers. In the course of such wanderings, I have come to a few conclusions. One is that no one can discuss investments unless you have a laptop computer that can show overhead slides. The second is that few people are really listening when the lights go down.
Hence what I want to do in this occasional blog (the Internet equivalent of a diary; the word comes from Web log) is to describe investments, companies, books, travel, people, and ideas that I find interesting. I will try to keep the entries to succinct, and I promise to you large type and few numbers.
The goal is to distill a life busy with memos and meetings into a few coherent suggestions for potential investments. Or to raise possibilities for investments that can be more thoroughly evaluated.
BAD MONEY:
In June, I had the good fortune to attend the annual meetings of the M.D. Sass Resurgence Funds. The meetings took place outside New York City at the Doral Arrowwood Hotel, notable for putting elevators where no guests can find them.
The Sass Resurgence Funds buy the debt, and other securities, of failed companies, hoping they can nurse them back to life. Generally, they buy a large enough position to run the creditors’ committee or to appoint new management.
Martin Sass, the chairman and chief executive officer, is notable for hiring strong-willed, investment managers, and letting them do their jobs. He is also smart about managing money, but he is probably better about judging people.
During the conference I tuned out during many of the company presentations, but came alive during Marty’s opening and closing remarks. What he foresees is the coming collapse of the junk bond market, calling the present environment a “major inflexion point”—what the rest of us call a fork in the road. The reason is that many investors, in recent months, have chased yield, in their investments, to the breaking point. In early 2005, high-yield debt returned less than 300 basis points over U.S. Treasuries. As a result of these narrow spreads, issuers flooded the market in 2004-05 with more than $200 billion in new junk bonds. According to Sass, some $50 billion of these bonds are rated CCC, and a study of that market indicates that CCC bonds, within five years, have a default rate of 47 percent. Hence Sass describes these high-yield bonds as “toxic waste.”
What is the best thing to do?
Avoid investing in high-yield debt at this stage.
Look at funds like Sass’s, which will take big positions, in distressed debt, once that market has collapsed.
If you have to invest in bonds, keep maturities short, and stick only to AA or AAA-rated paper.
Whatever you do, don’t chase yield in such a combustible market, as the junk you may be buying could turn out to be your own portfolio.