Long VErsion

Feltus, Top Junk Bond Fund Manager, Prefers U.S. Debt
2007-05-23

By Caroline Salas May 23 (Bloomberg) -- Andrew Feltus, manager of the top-performing Pioneer Global High Yield Fund, expects U.S. junkbonds to outperform those in Europe and emerging markets becausethe Federal Reserve will refrain from raising interest rates. Feltus, who runs the fund at Pioneer Investment Managementin Boston, said policy makers will hold their target interestrate at 5.25 percent for the next 12 months, encouragingeconomic growth and keeping risk premiums on speculative-gradedebt close to record lows. There is about a 25 percent chancethe Fed will lift rates to contain inflation, he said. ``My No. 1 risk is inflation,'' not slowing economicgrowth, Feltus, 38, said in an interview. ``If inflation rises,it would kill the stock market, which would kill riskappetite.'' The $1.8 billion mutual fund has returned 5.9 percent thisyear, placing first of 15 rivals that buy below-investment-gradedebt of companies around the world, according to data tracked byBloomberg. It has climbed an annual average of 14 percent overthree years, ranking second behind the MainStay Global HighIncome Fund, which has increased an average of 15 percent. The Fed on May 9 reiterated that inflation is the``predominant'' risk to the economy. Federal Reserve Bank ofRichmond President Jeffrey Lacker, who alone voted to raiserates in the last four meetings of 2006, said yesterday hedoubts a cooling economy will cause inflation to recede. Growthslowed to a 1.3 percent annual rate last quarter, the worstperformance in four years. The central bank's preferred inflation gauge, whichexcludes food and fuel costs, has exceeded its comfort range of1 percent to 2 percent for about three years.

Spreads Narrow

The extra yield, or spread, investors demand to own high-yield debt instead of Treasuries has narrowed to 2.5 percentagepoints this year from 2.89 percentage points last year,according to Merrill Lynch & Co. index data. Junk bonds arethose rated below Baa3 by Moody's Investors Service and BBB-byStandard & Poor's. ``As long as the economy stays strong, profits will staygood and defaults will not'' rise, said Feltus, who took overthe $4.5 billion Pioneer High Yield Fund last month aftermanager Margaret Patel left the firm. ``What drives spreads atthe end of the day is defaults.''

Overweight in U.S.

Feltus said the global fund is overweight in U.S. high-yield debt, meaning it has a greater proportion than itsbenchmark, because of better risk-adjusted returns over Europeanand emerging-market junk bonds. Global High Yield has 57 percentof its assets in the U.S., twice as much as in emergingeconomies. It has about 10 percent in the rest of the world. ``In Europe, your average new deal is coming with the samespread and'' a higher ratio of debt-to-earnings, Feltus said.``We're always going to go the route of less risk and higherreturns.'' The Global High Yield Fund has the highest rating of fivestars from research firm Morningstar Inc. in Chicago and aSharpe ratio of 1.96. The High Yield Fund has three stars and aSharpe ratio of 0.94. The average for high-yield funds is 1.18.A higher Sharpe ratio indicates better risk-adjusted returns.