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By Jeremy Glaser | 06-12-2013 05:00 PM

Looking for Distress

Some of the best opportunities are when people are trying to run away from situations that are uncertain, says Third Avenue's Tom Lapointe.

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. I am here at the 25th Anniversary of the Morningstar Investment Conference with Tom Lapointe. He is the portfolio manager of the Third Avenue Focused Credit fund.

Tom, thanks for joining me today.

Tom Lapointe: Thanks, Jeremy. Thanks for having me.

Glaser: So, most high-yield funds really take pains to get away from distressed situations and get away from those workout situations. Your fund is a little bit different. Can you tell us bit about the strategy?

Lapointe: We really, unlike most funds, actually look for distressed investments or ones that might default. So, we find some of the best opportunities are when people are trying to run away from situations that are uncertain, might involve bankruptcy, and that's where we can get the best value.

Glaser: Right now, there is not a ton of distress in the corporate market. Profitability is pretty high. Are you finding a lot of values?

Lapointe: It's harder. It's definitely harder. I’d say when we started the Focused Credit fund four years ago, we were probably looking at two or three investments and buying one of them. Today, we're digging through 10 or 15 and buying one of them. But what's nice about the corporate space, whether bank loans, high-yield bonds, converts, or preferreds is in Corporate America, you always have defaults happening.

We have had three major cycles of defaults, but in those cycles there’ve been little mini-default cycles whether it's the theater business or some sort of cyclical industry. So, we're always finding little opportunities. Right now, [we're looking at] the steel industry, the coal industry, gas industry. So there’s always opportunities; you just have to dig a little harder right now.

Glaser: Are you expecting defaults to rise appreciably? Do you think the economy is going to get turned around, or do you expect [defaults] to remain kind of this low?

Lapointe: At the risk of making a prediction, I think defaults will probably stay low for the next two or three years, below 2%. I think the key risks today are interest rates rising and what sort of duration [a measure of interest-rate sensitivity] you have, if you have credit duration or if you have duration closer to Treasuries. I think the U.S. economy is probably doing better than people give it credit for, and I think those factors would lead people to want to be invested more and take credit risk and not foreign exchange or duration risks.

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