Sjoblom: You also run a high-yield California fund. As I understand, that fund has significant exposure to the land-secured sector, which has some links to the real estate market. Can you talk to me about your outlook for lower-quality munis in California in general, and what you've been doing to prepare that fund for a time like this?
Costas: Well, what we did to prepare that fund for a time like this was actually done in 2006, when we all sat around the table, looked at our exposure, and said, "Are we going to be comfortable with all of this when the housing correction comes? And, it will come, and a recession will come." So, we were right talking about a recession. I can tell you, being one of those people thinking about that, that I never thought it would be this deep or this powerful, but here it is. Decisions like that need to be made before it happens because one thing we know about this market is that when the bad news comes, and everybody tries to sell at the same time, it does very poorly. So, you don't want to be stuck with anything that you don't want to hold in a tough period.
So, we made those decisions back then, and you're right: It is exposed to the land-secured sector. Up until that time, it was estimated that about 70% of the California high-yield market was actually represented by that sector in terms of new issuance. If you have a Cal high-yield fund, you have to pretty much play that game, but this is another instance of where great research and security selection is what really separates the best performers from the ones that are not doing too well now.
Because we are based in California, because we have done this for so long, because we have three research analysts whose whole job is to look at land-secured deals plus a head of research plus a portfolio manager of the fund who was a research analyst specializing in this, we really had a great expertise and advantage on this one and focused on buying these properties and these deals where we thought the location was going to make them be really valuable even in a tough time.
So, I'm really proud to say that so far, and what I could, I think, convincingly make a case is with the depression in the California real estate market now in its third year, we haven't had a single default in that fund in the land-secured sector, and from what we can tell now looking at delinquencies and development status, and reserve funds, we don't expect to see one through the end of this year either, which is I think quite a claim to make in a market like this.