Andrew Jessop, 42, and Rachel Golder, 44, managers of the $2.2 billion Goldman Sachs High Yield Fund, spent seven years working together at the Saudi International Bank, so it's no surprise that they have more of a global outlook that most junk-bond managers. Over the past five years, they had as much as 25% of the fund assets in western Europe, and that really paid off as the dollar weakened against the euro.
The pair, first-time winners of the Standard & Poor's/BusinessWeek Excellence in Fund Management award, have gained an average of 9.5% a year over the past five years, while taking less risk than competitors, according to S&P. Even last year, when credit downgrades in the auto and airlines sectors gave high-yield managers a hard time, Jessop and Golder pulled through with a 3.6% gain.
This year, the junk market is hardly a bargain, as below-investment grade bonds yield only about 3.5 percentage points more than Treasuries, a historically skimpy premium doesn't provide much protection against possible defaults. Still, this year should be better than 2005, the two say. That's because other than in the auto sector, default rates have declined. If most issuers stay current on their debt and bond prices don't gyrate too much, Golder figures the market ought to return about 6% this year.
Default rates are in decline because the weakest bonds of the telecom and Internet bubble period have mostly been restructured or gone into bankruptcy. Looking down the road, the growing number of leveraged buyouts is setting the stage for an increase in defaults in two to three years, the managers say.
"The market is at its cleanest point now of any point in the credit cycle," says Jessop. "It has purged out the weaker names and we haven't got to the point yet where default rates are rising significantly."
On the flip side, the fund will continue to benefit from bonds of companies that have successfully completed LBOs and are now going public again. The wave of LBO equity offerings has improved the credit quality of holdings like Dresser and Huntsman, for example. With the market for initial public offerings looking stronger this year, the Goldman fund will continue to benefit.