Dan Culloton: Where are you finding opportunities in the corporate space right now, especially after the strong run that corporate securities have had in 2009 and 2010? Are there many opportunities left?
Tom Dugan: Yes, I mean certainly relative to where valuations were a couple of years ago, the corporate market is not the super bargain that it was at the end of 2008, for example.
On the other hand, the health of corporate issuers is substantially better than it was two years ago, and a lot of the uncertainty associated with that environment has dissipated as capital markets have repaired. The economy has recovered to a certain extent. The economy is growing again. There is a lot to be positive about with corporate issuers generally, some of which has been reflected in valuations, which have gone up considerably since the lows of the crisis.
We think there is a substantial amount of opportunity left. Some areas that we've focused on particularly recently would be in the bank and finance area. We've increased that weighting in the fund in 2010 by 3 to 4 percentage points. We think that's a fertile area. There is still a residue of uncertainty surrounding that sector that has presented itself as wider, or cheaper, than typical valuations relative to their peers in industrials, for example.
And we think that in many cases a lot of good news still awaits bank issuers, and by that I mean that credit losses have perhaps peaked, that they can begin to unwind some of the reserving that they did for those losses, and that the effects of regulation, the Dodd-Frank Act and Basel III as well, will tend to focus those businesses on higher capitalization levels, more dependable businesses, greater transparency, and greater liquidity. And we think that's a very good recipe for bond investors, and so that's given us comfort in terms of adding to that weighting and that's an area we are excited about.