Fuss: Nothing Is Outlandishly Cheap

Question: Biggest threat to bond investors now – rising interest rates or credit defaults?

Fuss: Neither is on top of us right now. Eventually, it's rising interest rates and it doesn't necessarily threaten, it depends how you deal with it. Defaults are always a big problem. They are just not here in present right now, specifically in U.S. corporates. For the moment, they're very low. As you go forward into even this current cycle, it's going to be more of a problem in the low grade area because the new financing is done with lousy indentures to protect the issuer. Good for the issuer, bad for the investor. It happens every cycle, and its happening again.

Q: How concerned are you about inflation?

Fuss: Very. Again, with a lag. The driver underneath inflation is actually, rising rates. It's not the other way around. The rising rates become a component of the rise in inflation. They also reflect an environment that means that resources, people and things are becoming more scarce during periods of economic ebullience. So if the money is there, it makes it possible. So longer term, yeah, I am.

Q: What sectors are offering the most values?

Fuss: That's a tough one, because nothing is outstandingly cheap. There are a few, but they scare the bejesus out of people. I mean, I said one on national TV yesterday. I never should have. But by now, everyone will have commented on it. The periphery of Europe and government debt, not corporate, corporate is too pricy. Ireland – you want to upset people as far away as Zurich, say that on national TV. You get emails right away and it was night time over there.

Q: So, my next question is, where are the opportunities abroad?

Fuss: That's it. In the U.S. there is no outstandingly cheap area. Investment grade is certainly cheap relative to treasury, so is everything else, because treasuries are overpriced. But when you adjust for that and look at the average dollar price on our corporate bond, say, roughly 110, it's not a good thing.

Q: Why are European corporates more expensive than U.S. corporates?

Fuss: Supply and demand. Inflows and a lot of the mandates run by what are nominally called hedge fund managers are really investment management firms with some of their products being fairly high-priced, others not. There is a lot of money and it's going to them for a little bit extra yield and there is not as the same degree of new issue responsiveness yet in Europe. They are learning our ways however so don't despair.

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Q: Are you concerned about the amount of new money flowing into your funds?

Fuss: Well, no, because not a lot is, for us. I am concerned and we're cash flow positive. In the aggregate, some of the funds and I've got some positive – a few of them very positive. But I am watching the amount of money going into not so much mutual funds. That's rather impressive in the high yield area. It's the ETFs and the ETFs have a lot of good aspects to them, but it's a very dangerous style to invest if you get into a narrow mandate which they all are. When you have the outflows, this is probably the most important thing to me to watch for, to be concerned about because it will provide a wonderful buying opportunity. In other words, kaboom, ahead of you.

You hit these narrow mandates and in investment-grade corporates or in common stocks it's all right, unless it's too narrow, sub-sector in that area because you can proxy it with derivatives that are in fact very liquid. They have their own set of problems, but it's counterparty risk type stuff. In high yield, in emerging market local pay, the emerging market anything pay, those are narrow areas, you cannot have a good liquidity proxy worked in there.

So when the day comes, when the outflows come, and talk to any sponsor, what do you do? Well, you tell the investment bank to sell them. To who? Those are cash bonds.

Q: An investor starving for yields shows up at your doorstep – where would you send him or her?

Fuss: Next door or down the street. Kathy, you can't do it right now without getting silly. There are certain things you can do. I get this all the time. What do I do with my three months CD? Don't worry. You have the advantage of not having much taxable income.

Q: What is the biggest investing mistake you ever made and what did you learn from it?

Fuss: Oh, god. There are thousands. I learned a bad habit. Early on, it was sometimes often too late, now I am too early.

Q: Every good bond analyst has what common trait?

Fuss: I don't know of a common trait. There is a temperament bias on the portfolio management side and it is true for equity and fixed income. It's true in marketable securities, it's very pronounced. It's my own observation. For anybody watching this, who is familiar with Myers-Briggs or any of the other temperament things, there is a very, very pronounced, strong bias. The four general descriptors of Myers-Briggs, E or I or S or N or K or F or J or P – and oh my God, you find a really good experienced investor – old investors like me. I like old. They might be introvert or extrovert in clinical terms. A lot of introverts are very personable.

That doesn't seem to matter, except in getting to know them, to make sure you're right. They're highly intuitive people. They're somewhere up in that first decile, probably in their first couple of percentiles. And they tend to be – actually you say, they are obviously very thinking as opposed to feeling. That's not true. As a matter of fact, there is a gender bias there and when you adjust, you find that the portfolio managers are equally balanced on that.

It's really quite amazing. I get a lot of flack when I say that and I tell them to go look at the numbers. And then the perceptive judgmental, they tend to be judgmental and with an enormous thirst for knowledge, because they know it and they want to find the best perception. So they read all the research they can possibly find.