- ‘You know we think you want this arrow in your quiver’
- L.A.’s Crescent Capital manages about $20 billion in assets
Like many credit investors, Mark Attanasio, managing partner of Crescent Capital Group, says exchange-traded funds are exacerbating volatility in high-yield bonds. All the same, he is considering asking his clients for permission to use ETFs as an investment tool.
“When you look at what you can do and what you can’t do, they don’t want you buying ETFs -- they want you buying good old-fashioned bonds,” Attanasio said in an interview with Bloomberg Television’s Erik Schatzker at Crescent’s head office in Los Angeles. “We’ve gone to them and said, ‘Look, you know we think you want this arrow in your quiver,’ and so we are talking to some of our clients about expanding their guidelines to allow us to buy or sell ETFs.”
While ETFs remain a small part of the $1.3 trillion high-yield market, they’re gaining in popularity in part because the funds can trade with as much liquidity as stocks. The largest high-yield debt ETF, BlackRock Inc.’s $15 billion iShares iBoxx $ High Yield Corporate Bond ETF, has averaged 14 million shares a day in trading this year through May 27 -- more than triple its volume two years ago.
Investors in late April and early May pulled more than $3 billion from the fund, which trades under the HYG ticker, before adding back $1 billion later this month.
“Clearly ETFs are a bigger and bigger percentage of our trading volume in the high-yield market,” said Attanasio, whose firm oversees about $20 billion. “You have the advent of institutional investors who are trying to deal with market volatility using ETFs, and ETFs are actually sharpening volatility somewhat.”
The iShares ETF is up 5.9 percent this year and outperforming stocks after losing 5 percent in 2015, according to data compiled by Bloomberg. Speculative-grade corporate bonds have returned 8 percent in 2016, according to a Bank of America/Merrill Lynch index. Last year, the index fell 4.6 percent.
Attanasio co-founded Crescent in 1991, investing in senior bank loans, high-yield bonds, mezzanine and distressed-debt securities. His career included a stint working for Michael Milken, the former Drexel Burnham Lambert financier who helped popularize junk bonds. He is also chairman and principal owner of the Milwaukee Brewers in Major League Baseball.
The rise of ETFs has forced managers to reduce fees as alternatives grow for investors, Attanasio said.
“We all like to whine about fee compression but managed fees are down to a point where it’s probably pretty much the same price to have an active manager like us versus if you just go and buy an ETF I think,” he said.
While ETFs are becoming bigger players in the debt-trading market, increasing regulation has fueled the rise of alternative bankers as loan originators, Attanasio said. That’s increasing the cost of borrowing, he said.
“From our standpoint as investors, we’re lending money at higher rates than the banks used to for the same credit,” he said.
Attanasio said he doesn’t expect the Federal Reserve to jack up interest rates dramatically. The outcome of the U.S. presidential election is a smaller factor in his outlook for the credit cycle than the fact that there’s been a long, slow recovery that’s likely to be followed by an economic downturn.
“Given where we are in the cycle, it’s hard to believe in the next two years you are not going to have that readjustment and so you need to be positioned for that,” Attanasio said.