DJ TIP SHEET: T. Rowe Price High-Yield Mgrs Eschew Telecom22 Jun 15:00
By Christine Nuzum Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Managing a portfolio of high-yield bonds can be a field
trip for pessimists. Investors need eagle eyes for what could go wrong.
That's because while your investment can be quickly obliterated, exponential
gains are much rarer. This year, the junk bonds that have been wiping out were,
in large part, issued by telecommunications carriers.
As of Thursday, the Banc of America Securities Large-Cap Index for high-yield
issues was down 2.8% for the year, while telecom high-yield bonds were down
25.7%, on average, according to Banc of America.
So it comes as no surprise that portfolio managers at the T. Rowe Price
High-Yield Fund (PRHYX) see telecom as a problem area. At the end of last year,
the $1.5 billion fund had a 20% weighting in telecom; now, that position is
less than 15%.
The drop-off represents bond sales as well as declining value of positions,
says Nate Levy, an analyst for the fund. Meanwhile, the fund's holdings in an
array of other industries, ranging from health care to supermarkets, have
served it well. The fund has risen 3.4% this year, with money taken out for
fees, compared with a 6.3% decline for the Standard & Poor's 500. High-yield
bond funds on average have risen 1.8%, according to Morningstar Inc.
Since the end of last year, the fund's 9% position in wireless communications
has been cut in half. Toward the end of the first quarter, the fund sold most
of its position in bonds of Global Crossing Ltd. (GX), which sells use of its
global fiber-optic telecommunications network to other telecom companies, and,
increasingly, to financial firms.
"We thought (Global Crossing) was one of the highest-quality companies in
that space," Levy said.
But Levy and portfolio manager Mark Vaselkiv look closely at T. Rowe Price's
equity research, which has been bearish on other long-haul carriers like Level
3 Communications Inc. (LVLT) and Williams Communications Group (WCG). They
decided to sell Global Crossing bonds when they were between 90 cents and 95
cents on the dollar. Recently, the bonds were quoted at 75 cents to 78 cents on
the dollar.
In May, the fund liquidated its then-small position in McLeodUSA Inc. (MCLD)
bonds because the managers were uneasy with the company's revenue projections.
The bonds of British competitive local exchange carrier Colt Telecom Group
PLC (COLT) were the fund's largest wireline holding at the end of March,
representing 1.3% of its total assets. In December, the zero-coupon bonds will
either begin paying a 12% cash yield annually or will be retired at a premium
to holders, Levy said.
Meanwhile, the fund's weighting in wireless communications bonds - 10.5% at
the end of the year - has declined to 8%. Nextel Communications Inc. (NXTL)
bonds accounted for 2.3% of the fund at the end of March. That position is one
of the fund's largest, but is in line with Nextel's strong weighting in the
overall high-yield market.
This year, cable companies have been issuing bonds in droves, and they
represent the fund's largest industry weighting. At the end of the first
quarter, 10.4% of the fund was invested in cable with the bonds of Charter
Communications Inc. (CHTR) and Cablevision Systems Corp. (CVC) at the head of
the pack.
"Cable is a kind of core area in high yield," Levy said. "They're not
massively cyclical. They can support a lot of debt."
In this market, he added, the fact that "they're not telecom" makes cable
bonds defensive issues, for the time being.
Levy cautions that over the next year, the cable companies need to stop
raising debt and start to pay it down.
The Baltimore-based fund managers like to look for bonds ripe for an upgrade
to an investment-grade rating. Levy sees such potential in home builder Lennar
Corp. (LEN), a 1% investment as of March 31.
This high-yield fund doesn't have a strict policy about liquidating holdings
once they attain an investment-grade rating. In fact, about 5% of the fund is
investment grade, Levy said.
-Christine Nuzum; Dow Jones Newswires; 201-938-5172
(END) DOW JONES NEWS 06-22-01 03:00 PM |
