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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Knighty Tin who wrote (94089)	1/17/2002 9:35:32 AM
From: JHP	Read Replies (2) \| Respond to of 132070

BOSTON CAPITAL Finding success by avoiding trouble By Steven Syre & Charles Stein, 1/17/2002 ometimes success is defined as being in the right place at the right time. On other occasions it's better just to be as far away from disaster as possible. Margaret Patel and her Pioneer High Yield fund fall into the latter category. Patel has risen to the top of the junk bond mutual fund world over the past three years by avoiding the kinds of disastrous investments that have sunk many of her competitors. In high-yield debt markets, that means bonds sold by telecommunications companies that have gone belly up or are fighting for their lives today. Like telecom stocks, many of the bonds issued by those companies have plunged in value or defaulted. Patel has steered the $1.25 billion Pioneer High Yield away completely from telecommunications investments for more than two years, an important factor in the fund's annualized return of 18.75 percent over the three years from the start of 1999 to the end of 2001. She's also stayed away from other problem industries like airlines and managed to avoid companies with asbestos-related liabilities. Her three-year performance placed Pioneer High Yield first in a field of 291 junk bond funds, according to Lipper Inc. Even more impressively, the fund left the next closest competitor and its 12.06 percent annualized three-year return in the dust. Patel and her Pioneer fund finished second in rankings for performance in both the two-year period of 2000-2001 and the year of 2001, in both cases trailing only the Morgan Keegan High Income fund, in a field of more than 300 competitors. Of course, there was more than dodging a few investment bombs behind Patel's superior returns in a poor market (junk bond funds lost 1 percent a year on average over the last three years, according to Lipper). ''There were a few other high-yield managers who avoided telecom but didn't come close to matching [Pioneer High Yield's] returns,'' said Scott Berry, a Morningstar Inc. analyst who follows the fund. ''She's been remarkably successful over the last three years.'' Pioneer High Yield produced big gains with a highly concentrated portfolio and an unusual emphasis on a particular type of junk-rated investment. The 10 largest investments of Pioneer High Yield account for more than 30 percent of its assets. More than half of its assets are held in its 20 largest positions. As a group, those investments carried risk ratings typical for junk bond funds. There isn't much sizzle in the names that top Patel's portfolio. Companies like Conexant Systems, Tower Automotive and Wesco Distribution lead the list. But each one still accounts for a good chunk of Pioneer High Yield's change. ''Diversification for the sake of diversification doesn't reduce risk,'' Patel said. ''The risk is company-specific. Although we have a highly concentrated portfolio, I think we have various industries represented that don't necessarily react to the same changes in the economy.'' Pioneer High Yield is unusual for its concentrated portfolio, but it practically stands alone when it comes to its holdings in convertible securities, which made up 63 percent of the fund at the end of the year. Convertible bonds pay interest and can be swapped for stock at a specific per-share price, an added benefit that usually adds a premium to their prices. But when stock prices sink far below the conversion price, the bond prices become much more attractive. When many equities got hammered, particularly technology stocks, Patel jumped in to purchase convertible bonds issued by the same companies. Patel sees it as simply a way to buy attractive debt at reasonable prices and doesn't get involved in complex conversion scenarios. ''I buy them for exposure to [specific] industries. At the end of the day, I want to buy bonds of companies that are well-positioned and well-run.'' But many analysts like Berry see convertible bonds as riskier investments than conventional debt because they can carry more price volatility and offer less security in the case of default. ''The convertible securities can be more sensitive to swings in the stock market than just plain vanilla high-yield bonds,'' he said. Patel is guarded about the prospects for junk bonds in 2002. The spreads between high-yield interest rates and those of both 10-year US Treasury bonds and short-term bills is extraordinarily wide, a definite plus. On the other hand, defaults by corporate borrowers will still be twice the normal rate if they slow down as expected by the end of the year. ''The risk is that the economy remains sluggish and really doesn't begin to pick up in the next three to six months. Personally, I think it will,'' Patel said. If not, she can still rely on a track record of making shareholders money in tougher economic times. Steven Syre (617-929-2918) and Charles Stein (617-929-2922) can be reached by e-mail at boscap@globe.com. This story ran on page E1 of the Boston Globe on 1/17/2002. © Copyright 2002 Globe Newspaper Company.