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Invest for the Full Cycle

Met West's Jamie Farnham says that investors need to position themselves for market inflection points before they happen, not during.

Eric Jacobson: Hi, I'm Eric Jacobson, director of fixed income research for Morningstar. I'm here today with Jamie Farnham. Jamie is the director of credit research for Metropolitan West Asset Management, and now, for the TCW high quality bond group. Jamie's also the lead manager for the Metropolitan West High Yield Fund, which is a key managed fund with the rest of his colleagues. I wanted to talk a little bit today about that fund and how it works. Jamie and his colleagues are nominated for our 2009 Manager of the Year Award. So I wanted to share some thoughts with Jamie on that. Jamie, thanks so much for being with us today.

Jamie Farnham: Thanks, Eric. Good to see you again.

Jacobson: Good to see you too. So, Jamie, the fund is a relatively new fund, in the sense that I think it was launched toward the end of, I want to say, 2002.

Farnham: 2002.

Jacobson: 2002, and because of that, it's not as large as some of the others, arguably a little more nimble. My sense is that you guys are a little bit more flexible in the way you run it. Maybe you could start off with the 10 000 foot view. Give us a sense of how you approach running the portfolio.

Farnham: I think that from the standpoint of our strategy is meant to acknowledge that there are a couple of different types of high yield managers out there. One skews to the higher quality type of investment. The other tends to lead to higher data or more equity like prospects and securities. Each type tends to do better at a certain point in the credit cycle. Our approach tends to mesh and take advantage of both segments when the market cycle is more appropriate. It tends to take less risk at certain times and more risk at other times. As a result, we take more of a full cycle management approach. Essentially, we take what the market gives us in the form of risk premiums over Treasuries.


So, the ability of being a smaller manager, having less assets under management allows the strategy to be more nimble and reposition the portfolio, as I think most market participants are aware that you can't reposition a portfolio on the fly when the market is in motion. You need to position yourself in advance of those market inflection points.

You've seen the robust performance or the spread widening in late 2008, and the significant spread retracement in early to late 2009. If a manager was trying to reposition during that time, it would have proved very difficult.

Our philosophy tends to combine in looking at areas that tend to be more conservative in times of low risk premiums, going into more secured securities including bank debt. In times of market deal averaging, significant widening and spread premiums is really approaching in going to where potential some of the most attractive areas of the market, where its spread the most premiums have widened the most significantly and those areas included some areas of the high yield market.

Even higher quality areas of the high yield market as well as other areas of ancillary slices of securities and busted convertibles, high yield municipal bonds that we've incorporated to an extent. It utilizes our relatively smaller size, and incorporating that into a full cycle management approach.

Jacobson: So anyone who' familiar with the fund knows that the timing of the launch was fortuitous, because the market had really sold off pretty badly back in '02. This was after a lot of problems, the first time we had a number of high quality corporates drop in the high yield space and so forth.

Eric Jacobson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.