Despite the credit crisis or perhaps because of it there has never been a better time to invest in fixed-income products, particularly triple-A commercial mortgage-backed securities, according to portfolio managers at Putnam Investments.
The Boston unit of Power Financial Corp. acknowledged that advisers are facing a great deal of uncertainty and a tough economic climate that could take a long time to level off. Nevertheless, Putnam says fixed-income products, such as commercial mortgage-backed securities, municipal bonds and high-yield bonds, remain very attractive.
Triple-A commercial mortgage-backed securities are attractive because they are protected from losses and are the best levels we have seen in 20 years, Bill Kohli, a Putnam fixed-income portfolio manager and team leader of portfolio construction, said in a conference call Tuesday.
This is an area that 10 to 20 years from now, we are going to look back on at the historic type of values in these securities.
The securities are well-protected and fundamentally sound, Kohli said. We would need an event five to six times worse than the worst market ever before you would experience any type of fundamental loss.
Unlike equity products, commercial mortgage securities will not be able to maintain their low prices for long, he said. There is a massive liquidation going on today in terms of firms selling their fixed-income assets. Prices this cheap will disappear.
These products are plain vanilla, very liquid, relatively straightforward to analyze, and well-diversified, Kohli said. This is as close to a free lunch as you can get right now.
Putnam expects a potential price return of 7% from triple-A commercial mortgage-backed securities, 7% from investment-grade bonds, and 13% from high-yield bonds.
When you look at all of these sectors, the spreads are as attractive as weve seen in our investment lifetime, Kohli said.
Analysts and industry observers said that during a difficult economic crisis, investors are interested in using fixed-income products to shelter assets.
But W. Christopher Maxwell, a managing partner at the Rock Hall, Md., wealth management firm Conestoga Capital Advisors LLC, said that despite this notion, many investors and advisers are very suspicious of ratings right now and are wary about investing in any commercial mortgage securities, even if they have a triple-A rating.
There are a lot of smart people out there that are trying to make astute judgments and trying to buy fixed-income products at a discount, but it can be quite difficult to find those values, he said. The difference between a successful triple-A-rated CBMS and one that is not so successful is not that big.
Kohli said it is critical to maintain a well-diversified portfolio that includes a variety of fixed-income products.
The fixed-income landscape is much more complicated than it was 10 to 20 years ago, he said. Companies need a certain degree of specialization to understand the dynamics. It is hard for a generalist or anyone who takes a general approach to grapple with all the issues in the fixed-income landscape.
Putnam had $166 billion of assets under management as of June 30, including $75 billion of fixed-income assets.
Kohli said in addition to triple-A commercial mortgage securities, Putnam believes that there are opportunities to invest in high-yield bonds, municipal bonds and even alternative-A mortgages. Even though many analysts and industry observers have turned their back on the alt-A market, Putnam has been buying such assets over the past few weeks, he said.