Pioneer's Taubes Targets Leveraged Loans as Spreads to Junk Bonds Narrow
Taubes, manager of the $3.7 billion Pioneer Strategic Income Fund, which has beaten 97 percent of its peers over the last five years, said he’s buying leveraged loans instead of high-yield bonds after the difference in yields between the two investments narrowed. The debt makes up the highest ratio of Pioneer’s U.S. diversified fixed-income funds since at least 2000.
“We had been buying them in lieu of high-yield debt for a number of reasons,” Taubes, 52, said. “Here’s an opportunity to buy something that doesn’t give up much yield at all to protect yourself against rising rates and you’re higher in the capital structure to boot.”
Debt investors funneled $435 million into leveraged-loan funds in the week ended Nov. 19, the second-largest amount on record, while taking $723 million out of high-yield bond funds, analysts from JPMorgan Chase & Co. wrote in a report. Loans, which have yields that are linked to the London interbank offered rate, “will benefit from the dearth of alternatives available to protect a portfolio against rising rates,” the analysts wrote.
Leveraged loans account for about 12 percent of the fund, Boston-based Taubes said in a telephone interview. That compares with 7.6 percent as of March and 4.4 percent in September 2007, according to Securities and Exchange Commission filings. Pioneer Investments, a unit of UniCredit SpA, oversees about $257 billion.
The fund has “the highest weight in bank loans in the 11 years I’ve been running it,” said Taubes, who also oversees the $1.3 billion Pioneer Bond Fund and co-manages the $97.2 million Pioneer Multi-Asset Real Return Fund.
The Standard & Poor’s/LSTA US Leveraged Loan Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has returned 7.91 percent this year after gaining a record 52.2 percent in 2009. Prices of the debt have risen 4.15 cents to 91.83 cents on the dollar this year, the index data show.
Taubes said loans still have more room to climb compared with high-yield bonds, which have risen 5.7 cents to 101.2 cents on the dollar, according to Bank of America Merrill Lynch index data. The securities have returned 13.6 percent this year after gaining 57.5 percent in 2008, the data show.
While high-yield, high-risk loans and bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- by Standard & Poor’s, loans have a more senior claim on assets than bonds and are repaid first in bankruptcy.
The Strategic Income Fund has acquired loans “much more assertively” in the past two or three quarters as default rates declined and junk-bond yields dropped closer to those on loans, Taubes said. The fund has returned 10.8 percent this year, according to data compiled by Bloomberg.
There were no U.S. leveraged-loan defaults in October, Moody’s said in a Nov. 4 statement. That helped reduce the 12- month rate of missed payments to 3.6 percent from 11.5 percent last year, Moody’s said.
As high-yield bonds have rallied, the yield on debt ranked BB has declined to 6.5 percent from 7.7 percent since 2009, Bank of America Merrill Lynch data show. The extra yield investors demand over Treasuries has narrowed 46 basis points to 593 basis points, or 5.93 percentage points, over the same period.
Loans with similar credit grades are yielding 5.5 percent, said Taubes.
Goldman Rates Prediction
The debt is attractive if yields rise because Libor, the rate banks charge to lend to each other, resets to a higher level, said Taubes.
Better economic growth and the “stabilization of recent disinflationary trends” means U.S. rates have reached a cyclical low, Goldman Sachs Group Inc. strategists Charles Himmelberg, Alberto Gallo, Lotfi Karoui and Annie Chu wrote in a Nov. 19 report.
“Our rates team expects long-dated Treasuries to move higher on economic recovery, both in the U.S. and globally, and the normalization of U.S. inflation expectations, with yields on the 10-year rising to 3.3 percent by the end of 2011,” the strategists wrote.
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